Experts Views On Banking in the Time of Covid-19

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"We will evaluate the situation and act accordingly."

The Monetary Policy for FY2020/21 has attempted to address many aspects of the economic slowdown brought by the four-month long lockdown. The arrangements encouraged business community members who were in a state of disarray due to the pandemic-induced recession. But they are now panicking again due to the latest restrictions imposed by the government to curb the spread of coronavirus.

The central bank incorporated measures in the monetary policy with a long-term view. For example, we deferred the loan repayment schedule by six months for ‘mildly affected’ industries, by nine months for ‘mildly affected’ and by one year for ‘highly affected’ and have even announced to further restructure and reschedule loans in case if needed. We will conduct a quarterly review of the monetary policy to assess the progress and make adjustments accordingly.

We are not in a position to determine the post-Covid path for the banking sector as the situation remains very uncertain at the moment. We will evaluate the situation and act according to the need. The central bank will take necessary policy measures for the banking sector after it is felt that the crisis has ended. At the moment, our core focus is on survival of banks, businesses and ordinary citizens.

At present, banks are definitely facing big challenges. The central bank has provided them concessions through policy relaxations in areas such as loan-loss provisioning. The scenario could have been much more difficult for banks if the central bank hadn’t taken accommodative measures. On the other hand, we have also barred banks to distribute dividends from last fiscal year’s profit to their shareholders so that no one would take undue advantage of the policy relaxations.

While it is difficult to predict the situation for banks in the current fiscal year, one thing is sure that the Nepali banking sector is very resilient in the South Asia region due to the regulatory arrangements. Due to the resilience, the banking system has so far managed to avoid big stresses and impacts created by the Covid-19 pandemic. Despite the hit to profitability, we don’t see other big challenges for banks at the moment as the situation remains manageable.

Bankers should understand that the factor of survival prevails over profitability at the moment; they can earn higher profits when the situation normalises. The cash flow of many businesses has dried up making the situation very challenging for them. Now as the banking system has excess liquidity, banks should lend money to businesses without hesitation to lease new life into the businesses hard hit by the crisis. Doing this will help in the economic recovery process as demand for bank loans will gradually increase in the consumer level ultimately positively impacting the business of banks.

“Profits of banks depend on how and when the situation will return to normalcy.”

We worked actively for nine months of the last fiscal year. Our interest payment collection and profit were impactedas the country was in lockdown for the remaining three months. Because of this situation, our last fiscal year’s financial report was not satisfactory. It is obvious that our profit declined following the directive of the Nepal Rastra Bank (NRB) to provide two percent concession to borrowers and loan provisioning.

Cash flow of banks and businesses has not been as expected even with the start of the new fiscal year. Banks are facing several challenges at the moment. We hope that the current crisis will subside and business activities will resume in the coming days, but it cannot be said when the situation will normalise.  For the current fiscal year, profits of bankswill depend on how and when the lives of people and business activities return to normalcy.

Currently, we need to focus on recovery of loans rather than investing in new sectors and search for new business. It should be realised that digital banking, which has been given priority by banks lately, is not only a source of income but is also about providing additional services to our customers. Banks should help to make electronic transactions a habit of customers by providing them services at reduced fees.

While merger has become an important topic in the banking sector in recent years, I think mergers should be done if such a move benefits all stakeholders of the banks. As competition among banks has increased, mergers will be justified only if two banks merge to form a strong entity.  It should be a matter of choice for banks to find the right partners for a merger. Similarly, the plan and priorities of mergers also need to be clear.

“We are not looking to earn profits at the moment.”

During the lockdown, Nepal Rastra Bank (NRB) directed banks to defer installment and interest payments of loans till the end of July. During the period, many of our borrowers did not clear their dues. However, we did not classify such loans as ‘inactive credit’. The increase in non-performing loans (NPLs) as seen in the last fiscal year’s financial reports of banks is because of non-payment of interest and installment amount by borrowers. Following the directive of NRB, we have not forced anyone to repay their loans. In the fourth quarter of the last fiscal year, we had already expected a decline in our profits.

The policies and targets of the Ministry of Finance are our guidelines. The government has set an economic growth target of seven percent for the current fiscal year. We move ahead to meet our business targets by considering the Federal Budget as the base. Nabil Bank has classified its credit portfolio in three tiers – ‘highly impacted’, ‘medium impacted’ and ‘not impacted’ – to find out a clear picture of the Covid-19 impacts. We are not looking to earn profits at the moment. Nabil Bank’s current focuses are to maintain stability of our balance sheet and to sustain the current crisis. Banks should not be forced to merge with each other. We are also looking into steps taken by NRB and we are ready to go into a merger if there are good partners.

Digital banking is the need of the hour and is poised to become the next frontier in the banking sector. Banks now need to provide services to their customers by enabling them to engage in digitally opening banks account and remote transactions rather than opening physical branches. This is why Nabil has established the ‘Nabil Digi Bank’ with an aim to transform the bank into a fully digital banking entity. We had started providing digital bank account opening service to our customers 12 years ago. But there were some technological limitations as the software was not much effective at that time and customers were also not interested in digital banking. Now we are using highly advanced software system to make the digital bank account opening effective.

“Outlook for the first quarter does not look good if this situation persists.”

The credit growth of development banks was 25 percent in the fiscal year 2019/19. However, the average profit of development banks in the last fiscal year was just 7 percent with several banks registering negative profit growth. Currently, the banking system is flooded with excess liquidity with increasing deposits and sharp decline in investments of banks.

All economic activities came to a grinding halt for over three months due to the lockdown and we do not know how long the Covid-19 pandemic will impact the economy in the current fiscal year. Currently, about 51 districts of the country are under prohibitory orders and transactions have declined further compared to the four-month long lockdown.

The outlook for the first quarter for banks does not look good if this situation persists. Also, it has become challenging for banks to meet the credit growth target of 20 percent for the current fiscal year set by the Nepal Rastra Bank (NRB). National-level development banks are stronger in terms of capital adequacy. But regional-level banks are weaker in this regard. NRB has not forced development banks to go into merger like commercial banks. Merger is not necessary for development banks in terms of business, quality and capital. Nevertheless, there is no hindrance for banks to merge. I see difficulty for a dozen small development banks that are operating in 1 to 3 districts. There is a possibility that such banks will merge to form a stronger entity.

“The loan-loss provisioning has helped us to reduce the Covid-19 impacts to some extent.”

There were activities in the financial sector even during the fourth quarter of the last fiscal year when the country was under lockdown. But we are facing several difficulties to carry on with our activities from the start of the current fiscal. This indicates the coming days will be more challenging for us. Nevertheless, the 5 percent loan-loss provisioning has helped us to reduce the Covid-19 impacts to some extent.

The prohibitory orders issued by several district administrations and local governments have led economic activities to come to a grinding halt in large parts of the country. There is no way to tell how long this situation will continue. We will have to face an economic disaster if this situation goes on for long and BFIs are likely to face mounting losses in the coming days. Time is running out to find alternatives to lockdownsand prohibitory orders in the government’s response to the Covid-19 crisis. We should also find ways to live alongside the coronavirus to carry on with our daily lives.

The number of finance companies has significantly gone down over the years due to mergers and acquisitions. The Monetary Policy for the current fiscal year has also sought to reduce the number of commercial banks in the country.  Merger and acquisitions(M&As) are carried out to bring synergy effect within the institutions andit is not that BFIs have to wait for incentives for M&As. It is not true that an institution will be strong with an increase in its capital. Rather it is the volume of business that matters the most to justify mergers.

Finance companies are also focusing on digitization of services like commercial and development banks. Digital services are the need of the hour and our focus should be on habituating customers on digital transactions. It won’t be that difficult as the young generation will quickly adapt to the digital environment.

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