High capital adequacy ratio (CAR) of commercial banks will help them to withstand the current shock.

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High capital adequacy ratio (CAR) of commercial banks will help them to withstand the current shock.

The COVID-19 pandemic has impacted the operation of commercial banks like other institutions. Not only facing difficulties to provide banking services to their clients in the wake of restrictions in the movement of people which has been in place since March 24, trouble is growing for banks interms of business growth and earnings.

Bhuvan Kumar Dahal, president of Nepal Bankers’ Association, a grouping of Nepali bank CEOs, says that while banks are facing various problems at present, they are financially sound and are able to withstand the shock created by the measures to stop the possible spread of coronavirus. In an interview with NewBiz Editor Mukul Humagain, Dahal talked about, among other topics, the way ahead for banks and the dispute between bank promoters and banks on interest rate cuts. Excerpts:

How is the COVID-19 pandemic impacting the Nepali banking sector? What areas of the Nepali banking industry are hit hard by the pandemic-induced crisis?
We're accessing the current situation in three periods, pre-lockdown, immediately after lockdown and long term post-lockdown. The situation was more or less normal in Nepal before March 23 even though the tourism sector hadalready beenimpacted bythe Covid-19 pandemic. After the beginning of the lockdown on March 24, every sector has been affected and the banking sector is not an exception.

Currently, banks are providing essential banking services only from limited number of branch offices. As the majority of branches have been shut down, our business has taken a huge beating. For instance, forex and fee incomes have almost stopped. Interest rate income, which is another major source of earnings for banks, has also declined due to the central bank's directive to allow borrowers to pay loan installments by mid-July instead of mid-April. Our point was that such waivers should be given only to those borrowers who are not in a position currently to pay the interest fees. A clear picture to determine capable or incapable borrowers in today’s situation would have emerged. But the central bank has made it applicable to all.Why would any borrower who had done good business for eight months and 10 days in a year want topay loan installmentswhen he/she gets such relief? Therefore, those who are capable enough haven’t paid their dues and some who followed the mid-April deadline of loan installment payment paid seeing the benefit of 10 percent rebate on interest rate. We have fears that this will cause a sharp increase in non-performing loans (NPLs) of banks.

Banks are interconnected to every sector of the economy. If the business of hotels is affected, we will be affected too; banks are losing foreign currency earnings that are generated through hotels.Currently, we are in the process of segregating the sectors to find out which businesses have been hit the hardest, hard,mild and least from the lockdown. From our analysis, what we are seeing is NPLs of the hardest and hard hit businesses will rise in the coming days. We have estimated that businesses in the hospitality, travel, entertainment and transport sectors will be the hardest hit.

When do you think things will normalise for the banking sector?
Currently, we have only been able to provide essential banking services to our clients. The resumption of banking operations depends on the length of the lockdown and thetime it takes for the threat of coronavirus to subside. Similarly, ouroperations also depend on the normalisation of business activities. For instance, hoteliers are expecting that it will take a year for normalcy to return to the hospitality industry. I think the pandemic will affect the upcoming main tourist season of October-December and the situation will improve from March-April of 2021. If we are ableto keep COVID-19 cases in the low numbers, it can send positive messages globally which can be an important tool for the branding of Nepal’s tourism.

Given the bleak economic outlook of the country, what do you think the situation will be like for the country’s banking sector in the foreseeable future in terms of business growth and profit?
The business growth of banks is less compared to last year. Profit growth has been just 4-5 percent till the end of Poush (mid December – mid January). On the basis of my conversation with other bankers, I have estimated that commercial banks will register negative profit growth in the third quarter of the current fiscal year. I wouldn’t say banks will face a loss by the end of the fiscal year, but their profit growth will be negative. Also, NPLs are growing as well. It wouldn’t be otherwise to say that banking will be one of the sectors affected by the COVID-19 pandemic. There are no fee and forex incomes for banks at present, and their interest income has also been deferred. Banks are required to provision their loan loss due to an increase in NPLs.

How strong are Nepali banks in the face of financial shocks? Has the Nepal Bankers’ Association (NBA) prepared a fallback plan in this respect?
Highcapital adequacy ratio (CAR) is the strongest aspect of commercial banks in Nepal. NRB requires each bank to maintain CAR at a minimum of 8.5 percent. However, it is around 13 percent at present. The economic shock created by the pandemic may hit the CAR by 1-2 percent and it may decrease to 11-12 percent which is still higher than the requirement set by the central bank. This indicates there is no reason to panic. Nevertheless, bankers are mentally prepared that there will be a decline in business growth. This this will lead us to business consolidation. Bankers are also clear that they have to support their business partners and clients. Their need for working capital will increase after the lockdown is lifted.

We are working with NRB to ensure that banks aren’t engaged in grabbing each other’s’ customers and that they are providing additional loans to their clients. As the central bank has said that it will increase the refinancing fund, the financial problems being faced by borrowers will be addressed through the liquidity part. Now we have to reduce lending interest rates for business houses. We have determined the interest rate hoping that the lockdown will be lifted after May 7. With the extension of the lockdown, NRB has formed a committee with representation of NBA to determine a new interest rate. Banks will have to reduce interest rates after the committee makes its suggestions.

What will the decline of remittance do to the Nepali banking sector? Will it create a liquidity crisis?
Remittance is one of the major sources of deposits for banks. Decrease in remittance inflow will indeed affect our deposit growth. This means the lending growth will also be impacted as well. Decline in remittancewill affect consumption activities hence imports will go down.

On a positive note, those returning from labour destinations can be provided employment opportunities in infrastructure development and agriculture sector. Those returning to Nepal are hard workers who have worked in disciplined environments. I would like to suggest the government to establish a separate ministry for affairs related to non-resident Nepalis. If we can offer them good work and business environment 500,000 to one million Nepalis living abroad will return.

Do you think the lockdown could be a catalyst for greater use and acceptance of digital banking?
The current crisis can be a blessing in disguise in terms of fostering digital banking in Nepal. More people are resorting to use of electronic payment and digital banking services now. Digital banking was growing in Nepal prior to the COVID-19 crisis. Mobile banking and debit cards have been growing at a very good rate in the last three years. The lockdown is likely to add momentum to this growth as consumers are getting used to payment through bank cards, digital wallets and QR code system because of their hesitation to go into crowds.

Why it is that banks are seemingly unwilling to provide relief such as extension of repayment deadlines and lowering of interest rates as asked by businesspersons and other debtors of the banks?  What do you think could be the way forward in this regard?
Bankers are clear that the hardest hit sectors need the full support of the government for revival. We have already decided to lower interest rates from May 14. However, we also need to be clear on whether or not the businessmen who have done good level of business for eight months in the current fiscal year and those whose businesses are running fine even during this adverse timeshould be provided financial relief. We will provide interest rate subsidies after evaluating financial statements of our borrowers. Banks are not the authorities to provide financial relief, they are also businesses affected by the COVID-19 pandemic. We cannot pass on the benefits to borrowers by slashing interest rates on deposits by big margins. It will be wrong to provide financial relief without evaluating the level of loss taken by borrowers.

There will be a slowdown in economic activities and business houses will be under pressure. Both the central bank and NBA are working to find ways to provide relief through reduction of lending interest rates. We will work according to the directives of NRB.

NBA has rejected the decisions made by the Confederation of Banks and Financial Institutions Nepal (CBFIN) including lowering of interest rates. Why it is that bankers have said they cannot execute the decisions of the bank promoters?
The members of the association are directors of our banks and we respect them. They decided on four aspects regarding the financial relief package. They have also provided anti-money laundering related suggestions to the government. Among the four decisions, we welcome the third one which is about providing suggestions related to cost-control measures of banks to the government. Similarly, the decision to conduct a detailed study of the economic impact of coronavirus by forming an expert tem is also commendable.

But NBA doesn’t agree with the other two decisions to provide 10 percent rebate on interest rate on loans including working capital loan to all borrowers. Earlier, we did not agree with the central bank on loan payment installment deferral. I would again reiterate that relief needs to be provided only to the affected businesses. It will be wrong to provide 10 percent rebate to the least affected or unaffected. Determining the interest rate is a matter decided by the management committee of banks. The understanding between the board and the management is that the focus of thedirectors is on policy issues while bankers run the day-to-day affairs of banks.

While respecting the intention of CBFIN to support businesses affected by the COVID-19 pandemic, we have expressed our disagreement on issues like determining the interest rate which is beyond their authority. They should have discussed and provided suggestions to us in this respect.

The new governor at Nepal Rastra Bank has already taken his seat. What role,do you think,should he play at this time of crisis?
The new governor is a seasoned central banker with years of experience at NRB. So he is well-versed in all the affairs of the central bank. He also has experience of handling a commercial bank. He was engaged in policy initiatives of NRB to address the problems created by the real estate bubble and the 2015 earthquake. He started the study of COVID-19 impact on the Nepali economy by forming a committee on his first day in office. We believe that he will take right decisions.

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