The old ways of banking are changing as Nepal’s banking sector, like the rest of the world’s, stands at a crossroads. And the choices made today will define its future.
--BY SANJEEV SHARMA
81 years after Nepal Bank Limited was established as the first commercial bank in the country, the Nepali banking sector has seemingly come to a crossroads. From issues related to liquidity management, financial inclusion, productive sector lending, CSR obligations and sustainable business practices to incorporating tech-driven aspects such as digititalisation of services and cashless transactions, without compromising on profitability and the financial health of institutions, Nepali bankers finds themselves surrounded by a number of questions at the moment. Finding answers to these crucial questions will prove how Nepali banks will be able to remove the hurdles in front of them and face the 21stcentury challenges.
In a bid to give the ongoing discourse in the banking sector a new direction and assist Nepali banks to chart a new path, New Business Age Pvt Ltd on September 21 organised the 5th NewBiz Business Conclave and Awards 2018. Various important issues were raised and discussed at the conclave under the theme- “Banking Strategies and Disruptions.” The event was attended by high profile figures from the country’s banking fraternity, banking and financial market regulators and corporate sectors. Chief Guest of the programme Dr Yubaraj Khatiwada, minister for finance stressed on the modernisation of the Nepali banking sector in keeping with the times to help develop the country’s economy. “Banks need to devise their own strategies according to the changes occurring in banking instruments, technologies and the clientele environment,” he remarked.
According to Dr Khatiwada, the amendments and revisions of BFIs related laws including Banking and Financial Institutions Act (BAFIA) and Banking Offence and Punishment Act, of the last 15 years and the several strategies devised and implemented by the central banking authority have been aimed at increasing the integrity and credibility of banks to the highest level. “Notwithstanding these legal frameworks and measures we’ve established, the banking sector is prone to certain risks coming from new technologies, new markets, and new relationships between bankers and their clients,” said Dr Khatiwada, adding, “The technological disruptions are there with the emergence ofIT-based financial instruments such as cryptocurrencies and telecom vendor-basedmobile money system and the inherent risks posed by the new instruments. Besides, there are challenges from the accelerating global integration in the financial sector with the rapidly expanding information technology and transaction risks associated with it.” He suggested that banks should focus on expanding their investment portfolios in sectors such as infrastructure building, hydropower, agriculture and tourism.
A Cautionary Tale
The keynote speech delivered by the famed Indian business journalist Tamal Bandopadhyay, consulting editor of Business Standard magazine and adviser, Strategy at Bandhan Bank Limited was a cautionary tale for bankers and the people attending the event. “The Indian banking system is undergoing a significant change at the moment. Times are very interesting for Indian bankers in terms of disruptions as the government recently announced the merger of three banks,” he said. Indian finance minister Arun Jatiley in mid-September announced the merger of Bank of Baroda, Dena Bank and Vijaya Bank to create a banking entity with a combined market capitalisation of INR 48,000 crore in a bid to start the consolidation of the country’s banking sector which is exposed to several risks at present.
Banks in India are now struggling with a big problem of growing non-performing assets (NPAs). When the Indian economy was growing at a rate of over 9 percent for three successive years before 2008, the Indian banking sector grew at a staggering rate of over 30 percent defying the theories of economics. Typically, many economists say that the banking sector of a nation should grow more than three times the economic growth of the country in the most optimistic scenario. “We are now paying the price for the high-speed growth which bloated NPAs of banks. As of June, 2018, NPAs of Indian commercial banks have amounted to INR 10.6 trillion averaging 11.6 percent, which, according to a Reserve Bank of India forecast, can go as high as 12.2 percent by March 2019,” he informed, adding, “On top of that we’ve assets that have been restructured and will be accounted as ‘Bad’, meaning the NPA level can increase somewhere between 13-15 percent. Furthermore, if the bad assets that have been write-offs from the balance sheets of banks are accounted for, the NPA level can hover around 20 percent.”
Meanwhile, Nepali banks are in a much comfortable position in terms of taming NPA related risks compared to their Indian peers. The data of 28 commercial banks of the fourth quarter of the fiscal year 2017/18 compiled by New Business Age shows that NPA of Nepali commercial banks averaged 1.33 percent, down 0.33 percent from 1.67 percent in FY2016/17. Some banking experts like former Nabil Bank CEO Sashin Joshi, who was one of the panelists of the conclave, believe that NPA levels of many banks in Nepal are actually higher than what they show in their balance sheets.
The low NPA levels are particularly due to the ‘loan evergreening’, a practice in banking in which debt-laden borrowers get more credit from their banks to repay previous loans, they say. “There is a lot of loan evergreening going on and it is a ticking time-bomb for the entire banking sector. The current NPA level is in fact incorrect. The central bank needs to be stricter in controlling such practices. Otherwise, we will be facing more difficulties than Indian banks,” warned Joshi during the panel discussion moderated by Sanjib Subba, CEO of National Banking Institute. The other panelists were Anukool Bhatanagar, Managing Director and CEO of Nepal SBI Bank, former banker Anal Raj Bhattarai, Maha Prasad Adhikari, CEO of Investment Board Nepal and Tamal Bandhopadhyaya.
Currently, only over 40 percent of the population of Nepal is estimated to have access to banking services. The government and the central bank over the last few years have taken some strong steps to bring the unbanked people into the banking system. The provision of NRB, for instance, requires all commercial banks to open one branch in all 753 local levels. As of mid-September, commercial banks have extended their branch network in 666 levels, according to a latest NRB data.
In emerging and developing countries, bankers as well as governments are thirsty to reach the unbanked masses. Nepal can learn from the Pradhan Mantri Jan-Dhan Yojana (PMJDY) initiative in India which has become the largest financial inclusion drive in the world with 330 million people coming under the banking fold with deposit collections amounting to over USD 12 billion as of June 2018. “Bankers in India have realised that it is not a CSR activity and this type of initiation can provide them with business opportunities to generate profits,” opined Bandopadhyay.
Dr Chiranjibi Nepal, governor of Nepal Rastra Bank, who was the Special Guest on the occasion cautioned banks not to engage in aggressive lending as it can spell trouble for the financial stability of the nation. “Only 40 percent of Nepal’s population has access to banking services. Banks are public trusts that operate with the deposits collected from the general people. Therefore, they need to be responsible in terms of lending,” he stressed.
Riding the Waves of Technological Disruptions
There is reluctance among the banking investors and bankers to invest in technological aspects of service delivery and creating new systems. According to experts, this situation has prevailed due to a combination of factors such as the fear of the unknown, issues related to cost, lack of understanding about the long term returns from investing in technology and a sense of complacency among the people in banking.
Technology is changing the entire landscape of banking globally. At the heart of the technological disruptions in the financial services realm is Fintech (financial technology), which has taken over the world by storm in recent years. After registering ground shifting achievements from Fintech 1.0 and Fintech 2.0, advanced and emerging economies are rapidly moving towards Fintech 3.0. From different types of electronic payment systems, anti-money laundering/counter financing of terrorism (AML/CFT) services, banking automation such as API-enabled banking platforms and big data analytics to use of artificial intelligence (AI) and robotics, Fintech firms are creating a big impact in terms of changing the lives of ordinary people and the ways in which banks and businesses operate the world over. The emergence of Blockchain technology has also created a viable space for innovative minds to explore new types of financial services.
Nepal is also experiencing this form of disruption. People are getting used to electronic payments, albeit slowly. eSewa, Khalti Digital Wallet, PayWay and Yoogal Business Technology are the major Fintechfirms in Nepal providing a range of digital and mobile-based payment services to their users. eSewa’s parent company f1soft is the pioneering Fintech company in Nepal having developed products in mobile banking, internet banking, tab banking, cards management system, digital wallet and online payment gateway. A few months ago, f1soft ventured into the area of predictive analytics and big data technology and data analytics by establishing a new company, EXtensoData. The firm is working to provide services to financial institutions by analysing their data to reveal patterns, trends and business prospects that can be important for decision making, mitigating risks and future planning. Nepal Finsoft is another company which has been developing a modern digital banking platform for microfinance institutions since late 2016.
Lately, there seems to be a growing sense of realisation among banks about the benefits of investing in the digital sphere. The start of web-based banking, introduction of mobile apps of banks, and most noticeably the commencement of Viber banking services by several commercial banks in the last two years or so, for instance, is indicative of this. The introduction of the Interbank Payment System (IPS) and connect IPS by the Nepal Clearing House Limited (NCHL) also is a stepping stone in terms of establishing a reliable web-based payment system and fund transfer mechanism through the banking network in the country. Some banks have also begun to use artificial intelligence (AI) to provide services to their customers. The deployment of the humanoid robot ‘Pari’ by Nepal SBI Bank at its outlet in Durbarmarg to assist the bank’s customers is an example in this regard. Three months ago the bank launched a new version of the robot assistant Pari 2.0 which can respond to customers in most of the languages spoken in Nepal. Meanwhile, Machhapuchchhre Bank in September started the AI service “Maya” to allow customers to get interactive information about the bank and the services offered through its website and Facebook Messenger.
Nonetheless, much needs to be done in digitalising banking services as creating a cashless society in Nepal seems a distant dream for the time being as cash transactions are still the most preferred way of payments for the majority of Nepalis despite the rising number of mobile banking users. According to a recent NRB report, mobile banking subscription has reached over
five million by September which was 1.5 million in mid-2016.
The participants of the NewBiz Business Conclave and Awards 2018 were convinced about the benefits of cashless transactions and use of technology in the banking industry. In the view of Hari Bhakta Sharma, president of Confederation of Nepalese Industries (CNI), cashless banking has other significant impacts besides the convenience in transactions. “The main feature of a cashless society is reducing the level of corruption. Globally, the banking industry is becoming tech-driven with cashless societies emerging across different parts of the world. We will have to see if Nepal can achieve that,” Sharma told NewBiz on the sidelines of the event.
Regtech (regulatory technology) and Suptech (supervisory technology) have also emerged as other key areas for bankers, regulators, the government as well as private investors to focus on in order to take the Nepali banking industry to the next level. Though Suptech is a relatively new concept in the international financial sector and is yet to take definitive shape like Fintech, the applicability of Regtech has been increasing post-2008, particularly in advanced countries. Regtech has a number of applications in areas including anti-fraud and risk management services, secure management of personal data of bank customers, automation of AML/CFT compliance and customer due diligence, and submission of regulatory reports, among others.
Focus on Security
There are some serious issues associated with the use of technology in banking which need to be carefully looked at. Over the last decade, security of data and transactions has emerged as the major issue with the pandemic rise of cybercrime. A report published by the global consulting firm Accenture in early 2018 notes that cybercrime costs the financial sector more than any other industry. According to the report, the economic cost of global cyber bank heists amounted to USD 1 trillion in 2017. Neighbouring India is also coping with intensifying waves of digital attacks to banks. In early August, hackers managed to steal INR 94 crore from a Pune-based cooperative bank.
Though the magnitude of cyber attacks is negligible in Nepal compared to other countries, basically due to the low level of exposure of banks as well as their customers to digital banking, the risks are increasing. The most notorious case of cyber robbery in Nepal was registered a year earlier when USD 4.4 million was transferred from NIC Asia to bank accounts in countries like China, United States, Japan and Singapore. Though the money was later recovered, the incident came as a warning to banks in that that they will not be able to defend themselves in the coming days without building robust IT security infrastructures. The central banking authority, which had earlier used moral suasion to persuade banks to invest in technological aspects, now is becoming stricter, particularly in the area of cyber security. “For minimising cyber crime arising from online banking transactions and promoting cyber security, a provision for the mandatory audit of information technology system of all commercial banks will be formulated,” NRB’s Monetary Policy for FY2018/19 says.
Problems and Prospects in AML/CFT Regime
Internationally, there is a stringent AML/CFT regime in place which is closely monitored by global bodies including the Financial Action Task Force (FAFT) and International Monetary Fund (IMF). Being a member state of FAFT and IMF, Nepal is required to comply with strict AML/CFT rules and regulations to combat money laundering and terrorism financing. Anukool Bhatnagar of Nepal SBI Bank observes the existing AML/CFT regime in Nepal as being quite effective compared to the practices in neighbouring India and elsewhere. “A smart smile appears on the face of Nepali bankers when they read that big banks in other countries have been slapped with billions of dollars in fines for their negligence in following AML/CFT rules. We are much more secure because of the three-tier KYC mechanism and robust monitoring of the Financial Information Unit (FIU) and other bodies,” he said.
NRB Governor Dr Nepal, however, sees problems in making the AML/CFT compliance friendly to the bank customers. “Banks are harassing the people by forcing the customer to declare his/her father’s name year after year on the pretext of updating the Know-Your-Customer (KYC) details,” he claimed. He also mentioned the regulatory difficulties emerging from the use of technology in this area of financial compliance. “There are opportunities as well as challenges from IT. The rise of Fintech has added to the challenges in AML/CFT compliance,” he opined, adding that anti-money laundering rules have been mandatory in every sector and NRB has been monitoring the implementation side.
Adopt Changes to Stay Relevant
Speakers and participants of the programme agreed that the time has come for Nepali banks to change the ways in which they operate. “Our current banking practices have really become archaic. The brick-and-mortar banking has become outdated in today’s context. We are doing the same thing now that we did for the last 2-3 decades. In the meantime, the world has changed a lot. It is the convenience the modern day customers seek from the service providers,” said Joshi.
The global consulting firm Accenture in a study has found that the support of utility or Fintech companies will be necessary to most European banks over the next five. “We don’t need to reinvent the wheel and compete with the Fintech companies. The boards of our banks need to think slightly differently in this changing scenario,” mentioned Joshi, adding that the intervention of the government and regulators is not necessary for disruptions and the players in the sectors themselves can bring changes.
During the initial years of Fintech 2.0, Microsoft founder Bill Gates in 1994 in his tech-driven forecast of future famously stated that “banking is necessary, but banks are not.” Banking experts believe that by keeping themselves up-to-date with the latest technological trends eying the future is the way bankers can stay relevant in the present day world. “Smart bankers will remain relevant in the new context if they are able to ride the waves of technological disruptions happening across the world,” opined Bandopadhyay. According to him, Fintech companies are doing things much efficiently than traditional banks in terms of fund transfers, mobile banking and electronic payment, and creating new financial instruments. “The role of bankers now should be engaging in disruptions themselves, forming alliance with Fintech companies, reducing the turnaround time, changing credit and risk management procedures for greater efficiency, revolutionising the marketing procedures for a frictionless experience for customers and learning and applying AI to the huge amount of data at their disposal,” he said.
Bandopadhyay suggested banks to transform themselves from ‘lifecycle banks to lifestyle banks.’ “Till today, banks are providing ‘cradle to grave’ banking services to their customers. Now they need to become a marketplace and take care of all banking needs of their clients ranging from air tickets to hotel room bookings, among many other things, in order to stay relevant in this disruptive world,” he said.
Investing in People Development
Banking as a service-oriented industry requires people who are trained and well-equipped with the latest skills to operate the new technologies. NRB requires banks to spend at least three percent of their total employee expenses on training and capacity enhancement of staff. Experts point to the need for strategic investment to develop human capital in the banking sector. “We have a dearth of talented people in the banking industry. The same people and same level of knowledge and skills have taken us here. Now to take another leap, banks need to invest in their people,” expressed Joshi. He requested the central bank to become liberal in terms of allowing banks to hire people from outside the country. “This will result in transfer of skills and technology in the domestic banking sector,” he said.
What Vision 2030 means for the Nepali Banking Sector?
Nepal aims to become a middle-income country or graduate from its current LDC status to a developing nation by 2030. In the next 12 years, the government’s GDP target is an ambitious USD 80 billion. But there are some significant hurdles for the banking sector to align itself with the national development agenda.
From 2015 to 2018, the Nepali banking sector has grown tremendously. The total bank deposit which stood at USD 17 billion has now reached USD 28 billion. The credit of banks has now reached USD 24 billion from USD 13 billion in 2015. The total operational expense of banks is now USD 25 billion which was USD 17 billion in 2015. According to chartered accountant Anal Raj Bhattarai, the growing middle-class in Nepal is fueling the demand for credit which mostly goes towards consumption. “The growth of credit is much higher compared to the GDP growth. The money coming into the country as remittances is mostly used in consumption which is another factor for swelling imports,” he explained.
In spite of the substantial growth, Nepali banks face challenges in terms of managing financial resources to support the GDP growth target set by the government. Nepal needs large domestic corporate investments, foreign direct investments (FDIs) and foreign institutional investments (FIIs) to maintain a high economic growth. “At present, the capital is not coming basically due to the high cost of doing business and regulatory hassles leading to an unsupportive investment environment,” said Bhattarai. Currently, Nepal’s FDI volume stands at just one percent of the GDP. However, the inflow of foreign investments in the country increased by 30 percent in 2018. “To realise the SDGs, we need to spend almost Rs 1,770 billion a year. Given the capacity of the government, it seems almost impossible to spend such a huge amount of money at the moment. So we need higher levels of FDI to achieve the SDGs and the GDP target by 2030,” said IBN CEO Adhikari. According to him, FDI is not only necessary for our funding, but also for the transfer of technology and skills alongside narrowing the gap in the balance of payment (BOP) and trade deficit.
In a country like Nepal where the environment for big corporate organisations with large investments is unfavourable, small and medium enterprises (SMEs) and micro enterprises play a big role in the national economy. The importance of SMEs is highlighted by the fact that SMEs contribute 22 percent to the GDP and provide employment to about 1.8 million Nepalis at present. The recent years have seen Nepali banks prioritising SME lending. Partnering with SME development programmes like Sakchyam Access to Finance of the Department for International Development (DFID), BFIs have been helping the SMEs to grow. Most banks have specific banking services and products targeting SMEs. Nepal SBI Bank is among the leading institutions supporting SMEs. “We have shifted most of our business operations outside Kathmandu. We are heavily into the SME sector and have been providing them with the technology platforms and linkages with some big businesses,” informed Bhatnagar, adding, “We have different SME targeted programmes like the electronic dealer financing scheme, among others.”
The SME sector offers a big business opportunity for banks in Nepal. A 2013 report published by the International Finance Corporation (IFC), the private sector arm of The World Bank, estimates Nepal has an untapped market of USD 2.5 billion for small business lending. “Our mapping of business opportunities has revealed that there is a big potential for agri-business and sustainable market opportunities for SMEs,” shared Bhatnagar. In terms of lending, Nepali SMEs can become a disruptor in the banking system. Bankers at Nepal SBI Bank are experiencing this as the institution has taken a different approach than other banks in helping to build a vibrant ecosystem for SMEs at different locations across the country. The bank in July 2017 launched a project called the Nepal SBI Digital Village at Jarsingh Pauwa of Sankarapur Municipality. The bank is the sole banking services provider in the area serving businesses and people of the locality. The project, which was started with a capital of Rs 20 million, has become a big success for Nepal SBI.
According to the bank, it has extended about Rs 220 million in loans to the borrowers of Jarsingh Pauwa. Nepal SBI is also planning to develop another digital village somewhere north of Pokhara targeting SMEs.