How do you look at the state of the banking sector in the prevailing political instability of the country?
The banking sector is doing well. As you know, we are regulated by the central bank. As far as looking at the health of the financial sector, looking at the yearly profit of class A banks, is concerned, it has been quite encouraging. There is a quite substantial growth in profits. So that must mean that the sector is doing well.
Despite the sluggish economy, how have the commercial banks made profitable growth?
Credit growth has been faster than deposit collection. This means that the major reason for profit generation is credit expansion.
How about Himalayan Bank?
So far as Himalayan Bank is concerned, we have now been maintaining credit-deposit ratio at 78 to 79 per cent from 74 to 75 per cent in previous years. We have also been actively monitoring and managing the interest rate spread to the level permitted by Nepal Rastra Bank (NRB). Along with others, commercial banks have garnered profits from other sources like interest income, remittance income and treasury income.
As the CEO of a leading A class commercial bank, how do you see the recent monetary policy announced by the government?
The monetary policy has been welcomed by all the commercial banks. Only issue we had with the monetary policy is two percent going in the private sector for direct lending. Our opinion in that is either the central bank should have directly consulted with us regarding this provision or they should have phased in slowly because we don’t have the capability to directly lend in small scales.
How did the central bank propose this without consulting the commercial banks?
I think the central bank may be under a pressure from stakeholders or from the government. We know that there have been people in the government and parliament who have been saying that the banks are not lending money to the rural areas targeting the poor. I think these people are misinformed. We have been investing quite heavily in all the micro finance institutions in rural parts of Nepal targeting the poor. We have also built up the capacity of these institutions. Our lending program is vital for their survival. There are two areas to grow: one is looking at MFI and its growth. The other is banks have also heavily invested in Small and Medium Enterprises (SMEs). You can see the growth in bank's lending. There is the highest growth in bank lending to SMEs. It shows that the banks have been lending to the general public. I don’t think that political edict to the banks to increase the investment in this or that area is a good prescription.
What is the bank’s policy?
Banks have never hesitated to issue loans to micro-small-medium enterprises (MSMEs), and entrepreneurs with innovative ideas. And we will do the same in the future as well. For credit of over Rs 500 million to be issued it needs to be done as a consortium loan and private sector umbrella organizations have been requesting government to withdraw this provision.
How do you sustain the current trend of deposits when remittances continue to decline?
There are substantial deposits in the country. We have quite a big parallel economy when we look at IPOs, we can see that almost all of them are oversubscribed by fifty or sixty times and during that time we don’t see the deposit is dropping. It means that the money is coming from outside somewhere. So, when we see the growth of savings like in Himalayan Bank, it is a healthy growth. There are deposits. What we need to do is to bring the informal sector into formal sector. Once we can do this, there is adequate space to increase the deposits.
Don’t you think that the performance of commercial banks (in terms of profit generation), and the capital market boom contradict the economic slowdown in this fiscal year?
I do not think this is contradictory because our economy has been suffering due to political reasons. The country has been surviving even when economic growth has been slow. The government’s spending in the development sector can stimulate economic growth but it has not been happening. It is only the private sector that is taking the lead to stimulate the country’s economy.
I think a parallel (informal) economy is functioning in Nepal. We (banks and financial institutions) have been doing fair business even to collect deposits from the public, we need to follow the KYC (know your client) procedure, among others. However, there is no document like KYC required to purchase shares. It is surprising that billions of rupees are being collected during the initial public offerings and further public offerings of various companies without any decline in the deposit of the banks.
Following heated debates, Legislature Parliament returned the Bank and Financial Institutions bill to Finance Committee to revisit it. How do you look at this?
In total, the BAFIA bill has not changed so much. There are some issues regarding the corporate governance at the central bank and mainly term limits for CEOs, directors and chairmen. In my view that is not worthy because we are a heavily supervised and regulated industry and so the argument that someone stay in a position for long misuses the position is something I don’t believe. The problem began when the central bank was very weak and it did not have a governor and it was under the acting governor. At that time the political situation was also very fluid. During that time the central bank was forced to issue a number of licenses under pressure. So, these banks were opened at that time and boards were constituted. There were definitely some issues not only in the banks but also in the financial institutions. Because of these problems and the banking crisis we had, you cannot draw the conclusion on these experiences to say that these people staying will be a problem. The main issue is proper-fit test has been done and once you issue license to make sure that those who have the license have the fiscal and financial responsibilities and are capable to meet them. There is no question to limit the term. I don’t think because one or two people misused office means the prescriptions should be followed. The actions should be taken to those banks and directors who misused the law.
At a time when Nepal’s new 3-year plan aspires to achieve higher economic growth with double digits, how will commercial banks support the government?
I don’t think Nepal will be ever coming to achieve the double digit growth given the present stage. We still say that we depend upon the weather. If there is a good weather, then we have three percent growth in agriculture sector and two percent from other sectors or five or six percent we can achieve. Given the low level of projects and government’s investment in infrastructure, I don’t think we can ever achieve higher economic growth. Higher growth can be achieved only if the government can change its budget dispersing and implementation strategy. As you know, Nepal is the only country where private sector can support development but it cannot lead development. It is still dependent very much upon the government activities for economic growth. And as we see in the last six years the capital expenditure remained below thirty percent. It has been a main reason we have not seen growth.
For the post earthquake programs, the government has announced several packages including the concessional loans. How are private sector banks supporting the process?
Well, these have just been announcements. One package, of course, has been the relief to the earthquake victims. We have all been involved in this but unfortunately we have just received the money and we have just disbursed it. Nepali Congress and Maoists insisted on changing the tranches of aid disbursement and it delays the process. It is most disgusting some of our branches had already received the checks which were given back because of this. That has delayed work by almost three months. Apart from that for other development activities announced, they are yet to be implemented.
As there is a lot of debate over lending in housing, real estate and share markets, what is the state now?
This is in control. The central bank is aware of certain increasing trend in the real estate. In its monetary policy, the central bank has also been aware of the need to contain the lending in the real estate, housing and shares. They have put many conditions by changing the evaluation criteria to put a break in lending in real estate, housing and shares. In fact, the monetary policy adopted exactly the policy of Himalayan bank on share lending or marginal lending. I think the central bank is looking at the past experiences and is quite aware of increasing trend in real estate to see another crisis and another bubble.
As a person looking closely at the economic activities, how do you see the state of Nepalese economy?
It is unfortunate that Nepal’s economic potential is sapped by political instability. If we look at the economic development until 2000, we can see how well Nepal was growing. Once the insurgency and all the political turmoil came, we have been held in a pattern and, just year to year, we have been surviving. But banks have been doing well because we are intermediaries between depositors and lenders. There is also a need for credit and that role we have been playing. I don’t see that there is an easy path to look ahead when we see the new government announced only for nine months. This means for another nine months we are not going to see any substantial change. Thus, the political issues should be settled first so we can focus on the economic issues.
As a new government is in power, what do you suggest it should do to make the economy functional?
The government should focus on implementation of the budget so that the economy can gain traction. Raising capital expenditure to spur economic growth is our basic concern.