The Nepali banking sector has been facing several challenges. The challenges have emerged in the areas including bank financing, availability of investible funds, profit making and corporate governance. Their haphazard investments and a push to keep profits at high levels are often blamed as the major factors threatening the stability of the country’s financial sector.
These problems have given way to calls for banks to adopt sustainable business practices. For most of his professional career, Upendra Poudyal, former president of Nepal Bankers’ Association, has been a proponent of sustainable banking. Poudyal, who began his banking journey by joining Nepal Grindlays Bank (now Standard Chartered Bank Nepal) in 1986, became the CEO of NMB Bank in 2000. Currently, he sits at the boards of Nabil Bank and National Banking Institute.
In April 2018, Pouyal was appointed as the Asia-Pacific representative of the Global Alliance for Banking on Values (GABV), is a Netherlands-based independent network of banks working together to deliver sustainable economic, social and environmental development by using finance as a tool. In an interview with Ranju Kafle of New Business Age, Poudyal talked about the importance of values based banking, ways to change the course of traditional banking activities and sustainable banking practices in Nepal. Excerpts:
How do you define values based banking?
You need to first understand mainstream banking. Generally, the size of deposits, loans and investments and profits are considered as gauges to evaluate the performance of banking entities. But in values based banking, the impact created by the business of a bank and its activities are first closely looked at.
It is true that banks need to earn a certain level of profit to continue in the long run. Equally important is to keep the economic, social and environmental impacts of banking activities in mind. Values based banking stands on three pillars or the triple bottom line approach- the planet, people and prosperity. Our contribution to the economic growth of the country, investment in the real sector, contribution to entrepreneurship growth, initiatives to give more people banks, priority given to long term relationships with customers, maintaining inclusiveness in corporate governance and transparency in reporting, and identifying values for ourselves to practice in real life are among the factors that need to be closely looked at in terms of values based banking. Bankers adhering to values based banking follow the principle of ‘financing change and changing finance.’
The concept of values based banking emerged as a response to the collapse of Lehman Brothers which triggered the global financial crisis. Bankers from Triodos Bank, Netherlands, BRAC Bank, Bangladesh and GSL Bank, Germany, among others, come together to find the root causes of the meltdown and change the course of banking and finance by adopting sustainable business practices. Banks practicing sustainable practices were already there for many years, but the establishment of Global Alliance for Banking on Values (GAVB) in 2009 initiated a forum to institutionalise and promote sustainable banking practices. Over the years, the network of GAVB has gradually expanded. Particularly in Europe, the efforts of GAVB has maximised where banks have been optimally practicing the core principles of values based banking.
How is values based banking taking shape in Nepal?
Nepali banks have also been practicing some aspects of values based banking knowingly or unknowingly for some time now. For instance, the directives of Nepal Rastra Bank (NRB) related to deprived sector lending and productive sector financing are initiations of inclusive financing. Microfinancing is another example in this regard which has increased the access to finance of many unbanked Nepalis living in the remote parts of the country.
Nevertheless, there is little or no focus by banks as well as the government on minimising the risks posed by climate change. In fact, the risks have amplified for a country like Nepal where the mountains are the prime source of water. The banks can play a big role in this regard. They need to see if their investments are helping to tackle the challenges posed by climate change or not.
At the moment, it might be difficult for us to reach the sustainable banking levels of developed nations due to several reasons. But we need to start the process keeping in mind that it will bear fruit in the future.
The mainstream banking institutions should identify the focus of their activities and realign them to the values based banking. In the last few years, some commercial banks have started to engage in sustainable practices. Currently, I am a board member of Nabil Bank and we have decided that our annual report will be aligned to the Sustainable Development Goals (SDGs) of the United Nations. Our focus currently is on SDG number 8 which is Decent Work and Economic Growth.
What are the other aspects of values based banking?
Values based banking stresses banks to adopt a business model focusing on real sector financing and the multiplier effects of such investments. Another is investing by assessing the social, environmental and economic impacts and needs of the communities. Similarly, understanding the clients, developing a relationship with them and making investments with a long term view and understanding the long term risks associated while doing business with them are the other aspects. Furthermore, understanding the level of resilience of banks from outside risks and shocks is also important.
Operating banks by properly managing and containing long term risks is also an important aspect of values based banking. For instance, the shortage of investible funds in the Nepali banking system has been recurring on a regular basis for some years now. It is because of the haphazard financing by the BFIs which exceeds their capacity in collecting deposits. Likewise, promoting many staff to higher level posts who haven’t received proper training has added to the problem as such bank employees lack the skills to manage the associated risks. Inclusiveness in governance and transparency in business and record keeping are other aspects of values based banking. In a nutshell, all these aspects collectively translate into the business and work culture of banks in achieving sustainable banking.
How much easier or difficult is it to implement values based banking compared to traditional banking practices?
It is difficult to implement. When banks start making investments that can have wider impacts, it might be difficult for them to gain business volume in the beginning. For example, BFIs have not been able to increase investment in the agricultural sector as mandated by NRB’s provisions that have been in place for some years now. Yes, there are constraints for banks to invest in such sectors at the moment due to the lack of government support and other types of backups. Nevertheless, bankers are hesitant as they find other areas such as automobiles, real estate and housing as lucrative, safer and easier compared to manufacturing, agriculture and tourism. Banks can play an instrumental role in generating employment and economic development of the country if bankers are aware of the multiplier effects of their investments. Similarly, we haven’t been able to make investments by evaluating the possible environmental impacts.
Basically, we are at a nascent stage in terms of formulating and adopting sustainable banking policies. A few months ago, NRB in collaboration with the International Finance Corporation (IFC), issued the Environmental and Social Risk Management (ESRM) guidelines for the financial sector enabling BFIs to assess and mitigate environmental and social risks associated with banking activities. This has been a long practice in the international financial sector. Institutions like IFC have been rigorously following environmental and social assessments before disbursing loans. If the assessments are done stringently, a situation may come when financing in certain types of industries and businesses get discouraged. In this way, practicing values based banking is difficult than traditional banking.
Does values based banking require separate rules and regulations?
There are already some provisions for sustainable banking in the existing rules and regulations. NRB’s directives related to deprived sector lending along with financing in sectors such as agriculture, hydropower and tourism are some examples. But we haven’t been able to move ahead as intended in this regard. So far, a policy shift is needed in the NRB as well as the banks to a certain level in terms of the style of their functioning so as to encourage BFIs to get into sustainable banking by promoting and supporting the real economy.
What conditions must clients meet to borrow money from values based banks?
The conditions for credit won’t be difficult for the borrowers. Nonetheless, values based bankers closely evaluate the factors related to sustainability of loans besides the prospects of the prospective borrowers. For this, the central bank needs to make the credit policies compatible with the sustainability practices of the banks. For example, if a borrower is in genuine need of money and isn’t able to pay the loans on time, he/she may need additional financing and time. Currently, there is no policy to allow banks to provide additional financing to such clients who have the potential to revive or scale up their businesses. If the provisioning requirements aren’t relaxed, bankers will have no other choice than to go to debt recovery actions against such clients. At the moment, both the regulator and banks are still in a syndrome created by the past banking malpractices. Also, the definition of the ‘productive sector’ is constricted. The central bank needs to broaden the radius of the productive sector and increase the requirements of banks to finance that sector.
As you said, values based banking forbids investing in sectors other than real sector financing. But in the highly competitive world of investment, how can banks sustain themselves by not choosing to invest in such sectors?
We need to be clear that this not a short term approach in financing. If we start real sector financing, it will help boost productivity, employment generation and import substitution, ultimately leading to wealth creation. This approach of values based banking has multiplier and cyclic impacts where the creation of jobs and industrial/agricultural output raises the income level of people, and they spend more which generates domestic demand for goods, thereby increasing the requirements for bank loans for production. This way, it carries a long term approach. The last 10 years have seen values based banking practices yielding returns consistently for several banks the world over.
In Nepal, microfinance institutions (MFIs) are earning successfully in a sustainable manner. I think MFIs are a part of values based banking. Their activities are directed towards grass root community levels bringing the unbanked population into the banking radius. The mindset of bankers needs to be changed from profitability to sustainability. While the banks may not register windfall profits in the beginning after they adopt values based banking practices, their financial health will become better gradually.
What is the situation of values based banking in South Asia?
Values based banking is being practiced in various forms across the South Asia region. IFC, for example, has been encouraging financial institutions to follow sustainable banking practices. During a recent trip to the Indian city of Bangalore, I observed that well operated MFIs are being upgraded to “Small Finance Banks”, which in a way promotes sustainable banking.
At present, the values based practices are not only limited to the banking sector. Many business enterprises throughout the world, including China, have received the “B Corp Certification” for their social and environmental performance. Spending 10 percent of the profit in the area of environmental conservation is one of the requirements for companies to get certified. This indicates a globally changing scenario of operating for-profit institutions and ways of doing business.
Nepali banks are already engaged in various CSR activities. What differences will there be after they adopt values based banking?
CSR is an integral part of the activities of values based banks. Like other banks, they also spend money on various social causes. Members of GAVB also assist people of other countries. After the disastrous earthquake struck Nepal in April 2015, GAVB provided financial support to aid the victims. The aid money was channelised through the NMB Bank and I was the bank’s CEO at that time. Values based banking is CSR in itself. If banks can create enough employment opportunities for the working population of the country, it will be their biggest CSR undertaking.
How can Nepali banks fine tune their activities to help the country meet the SDGs?
Not only BFIs, but all businesses should be encouraged to align their activities and targets to SDGs. They need to see to which SDGs they can align their business activities with. If we aim for positive changes in the economic, environmental and social dimensions, SDGs can provide us the right paths on which to move ahead. In this respect, impact investment is an appropriate tool. Many impact investment firms have come forward in recent years and banks are quite capable of doing so too.