Nepal Rastra Bank (NRB) recently unveiled mid-term review of the Monetary Policy for the current fiscal year 2020/21 with no major changes. NRB decided to continue implementing its expansionary monetary policy. To provide relief to borrowers hit by the pandemic, the central bank decided to extend the deadline to get the loan restructuring and rescheduling facility until mid-July. While the economy is limping back to normalcy, the impact of the pandemic on businesses, banks and borrowers is expected to linger on. Sagar Ghimire of New Business Age caught up with Prabhu Bank’s CEO Ashok Sherchan to discuss the severity of Covid-19’s impacts on businesses, the recent policy measures introduced by the central bank and his bank’s performance and plans, among other issues. Excerpts:
How do you assess the mid-term review of the monetary policy?
The central bank has given continuity to most of the relaxation measures it had offered through the monetary policy. This was the need of time. Though it may not be visible on the surface, there could be a long-term impact of the pandemic in many business sectors. Small and medium enterprises (SMEs), schools, tourism businesses and transportation entrepreneurs are some of the businesses that have been hit most by the pandemic. While big businesses have either faced lesser impact or managed to weather the crisis, small businesses have been hit hardest by the pandemic. Many of these small businesses have either collapsed or are on the verge of closure. So, the steps taken by the central bank through the monetary policy to motivate them and stay afloat were right and should be continued throughout the current fiscal year.
By now you must have interacted with your clients and analysed adverse impacts of Covid-19 on businesses. How severe is the damage in various sectors?
It’s tourism that has been hit hardest by the pandemic followed by education and transportation. The hospitality sector including hotels and restaurants as well as the aviation sector faced huge losses. There is a moderate impact in manufacturing and trading. It’s good that there was not much impact in the agriculture sector and agro production remained high. The banking sector observed a surplus of liquidity which drove down interest rates. Lower interest rates gave the private sector some comfort during this crisis.
The government and Nepal Rastra Bank also provided an interest waiver to borrowers. Due to the government’s policy and banking sector’s initiative, the impact is less severe than what was anticipated earlier. However, we may see the real impact later. Loan repayments have been halted and there will be an accumulation of such repayment obligations. Firms or enterprises will have to expand their business and become capable of repaying loans. So far, the overall impact has not been as bad as feared. While some borrowers are having a hard time, the impact of the pandemic has so far remained mild for many.
So what about the banking sector?
Due to the extension of repayment deadline for the borrowers affected by the pandemic, we can expect an impact in some banks. Their profit may fall as they have offered a waiver in interest payments in line with the recent decision of the central bank. As banks are also members of society, we do not have any qualms about sharing some of the burden caused by this crisis. While shareholders may get lower returns this year, it will be better when the situation improves next year.
Is it that relief measures introduced by the central bank for borrowers hit by the pandemic will only defer the problems for them and banks?
If we try to sort out all the problems immediately, it could lead to complications. The relaxation through loan restructuring and rescheduling is aimed at providing some breathing room. It’s like buying time so that industrialists and businesses as well as bankers can work out plans to ease the pressure they are facing because of the pandemic. This is also a worldwide practice.
NRB introduced an expansionary monetary policy fearing a shortage of liquidity in the market and it cut rates to encourage borrowing. Isn’t it interesting that the opposite happened?
If there was a liquidity shortage during this pandemic like in the previous year, it would have been difficult for both banks and businesses. Luckily, we did not have the liquidity shortage problem this year which helped in boosting the confidence of customers, businesses, and bankers as well as the government. However, the loan expansion stopped. During the pandemic, infrastructure and development projects stalled, industrial expansion halted and businesses closed. But the flexibility exhibited by the central bank, as evident in its monetary policy, offered much-needed confidence during the crisis. The liquidity surplus during the pandemic was a big relief for businesses and our economy. Now is not the time to change the stance of the monetary policy. If the monetary policy is tightened, businesses, which have already been battered by the pandemic, could suffer further.
Economic growth has slowed down. But bank lending continued to grow during the pandemic. Where are banks disbursing loans at a time when the economy is in distress?
There was no growth in bank lending in the first six months following the outbreak of Covid-19 that led to a nationwide lockdown. But after that, there has been modest loan growth. As the situation gradually normalised after the government’s decision to ease the lockdown, imports picked up, industrial capacity utilisation increased, transportation service resumed and the stock market turned positive. It looks like most people focused on the stock market as they could trade from their homes at a time when Covid-19 disrupted their mobility. Consumer spending also declined sharply. They started to invest their savings in stocks. This is one factor that drove up the stock market.
Similarly, banks with excess liquidity invested in the stock market in the short-term. Many industries and enterprises explored other options and started to do business in a new way and took advantage of cheaper borrowing costs. For example, pharmaceutical companies started producing masks and sanitizers while restaurants started to provide home delivery services. Hotels that used to rely on foreign tourists came up with packages for domestic tourists. Since the interest rate is very low, industrialists and businesses are now looking for new projects. As banks started to disburse loans that were halted after the outbreak, we can see an expansion of bank loans. This trend is likely to continue in the current fiscal year. The construction sector which absorbs a huge investment is yet to gain momentum. Now that the government is expediting implementation of development projects, we can expect further loan growth.
It seems banks are struggling to meet directed lending requirements whereby they are required to disburse a certain percent of their loans in prescribed priority sectors. Why is it that some even prefer to pay fines rather than fulfill the requirement?
It is difficult to meet the mandatory lending requirement of the central bank. But at the same time such measures also help in bringing small to large scale businesses into the banking channel. Commercial banks should also pay attention to small businesses and entrepreneurs.
If a trader from Kathmandu gets a bank loan, a business in Darchula should also get that facility. These measures are also intended to support the government policy to channelise contributions of every citizen into the national economy through the banking system. There is concern regarding the penalty meted out to those banks that are struggling to meet the directed lending requirements. Rather than penalising them, we expect the central bank to facilitate banks and extend deadlines. At the same time, the continuity of directed lending requirement is a must to ensure that every trader/business—no matter from where and which sector—is linked to the economy of the country through the banking system. If we are able to channelise them into the national economy, it will be easier for the government to implement its plans and programmes.
It seems that commercial banks do not have much interest in meeting the directed lending requirements. Just because they lack interest does not mean they do not have to meet the regulatory requirement. But, I think the central bank should provide adequate time. The relaxation on deadlines is needed also because many commercial banks do not have expertise in the sectors where the central bank is asking to float loans and it takes some time to gain such expertise.
The central bank requires bank branches to disburse such loans to a certain number of borrowers. Some bankers also complain that such a policy could discourage a bank from opening branches in remote areas. What if there is no demand?
That is why I said the central bank should extend the time for banks to meet the directed lending requirements. Similarly, banks also should explore business opportunities in unbanked areas and find their clients. There is still a big segment of people in our society who do not have access to finance. In the absence of bank branches, they have to borrow from their relatives or other people they know. Banks need to explore such borrowers and bring them into the banking channel. I do not think that the demand side is weak. What is needed now is a serious effort from banks to explore new and unbanked areas.
While the pandemic ravaged most of the businesses in the country, it did not hurt the profitability of the banking industry by much. Is it due to efficiency or were banks immune to the Covid-19 ramifications?
Banks were generating interest and returns from loans disbursed and investments made before the pandemic. If a bank makes an investment of nearly Rs 100 billion, it is normal to make a profit of around Rs 2-3 billion. Banks will certainly collect interest on loans that they have disbursed as they are financial intermediaries. It is only a matter of volume of profit. We are thankful to customers who made loan payments despite the hardship they were going through during the pandemic. While banks earned profit, they also ensured that the interest rates they offered to depositors did not fall by much. Banks are not in a position to make undue profits as the central bank has put a cap on the spread between the interest rate they charge to borrowers and pay to depositors. Customers are also aware these days. Above all, banks do businesses very transparently.
If there is a cap on interest spread, why should bankers sit together to make a ‘gentleman’s agreement’ on deposit rates? Now they are not bothered by the saving rates falling below the inflation rate.
Interest rates are driven by demand and supply in the market. We had capped deposit rates in 2018 as interest rate on loans was going through the roof. Such ultra-high lending rates not only erode the repayment capacity of borrowers but also hit businesses. Lending rates have come down in recent months and so have deposit rates. Inflation, market prices, liquidity and interest rate on loans are all co-related.
Though the lending rate is tied up with the base rate, many borrowers often complain that banks raise interest rates on loans by sending a text while they are reluctant to immediately pass on the benefits of lower interest rates. How fair is this?
This is due to the terms and conditions of the offer letter issued to borrowers. The majority of clients do not read the offer letter. While customers do not read the provisions in the offer letter, banks follow the same offer letter and provisions mentioned there. If clients develop the habit of reading the terms and conditions while taking loans, all these issues will seem to be normal.
Prabhu Bank is in the process of issuing debentures worth Rs 4 billion. Do you think this is the right time?
We started the process to issue debentures last year. As we have to get approval from different agencies including the Securities Board of Nepal and Nepal Rastra Bank, this process takes almost 4-5 months. NRB also requires all commercial banks to issue debentures equivalent to 25 percent of their paid-up capital. Thus, issuing debentures was already in our plan.
Though the debenture was not necessary in the current market scenario when interest rates have come down, we also have to bear in mind that interest rates would eventually go up. Similarly, debentures will also enhance our capital adequacy ratio.
Prabhu Bank has a reputation of acquiring banks and financial institutions that are either in trouble or on the verge of collapse due to its history linked with the erstwhile Kist Bank and Grand Bank. Are you still facing such challenges?
Of course, there are challenges while merging with and acquiring such banks. M&As with such institutions call for a lot of focus on managing problems that could be inherited after the deal. We faced a similar situation in the first three years of acquisition of the two institutions.
However, these problems appeared to be small as we expanded our business. I must admit that those problems that we inherited still do exist, and it is natural as well.
Your bank’s AGM has already approved the agenda for merger and acquisition. Will Prabhu chase problematic entities as in the past or look for a stronger one?
A number of things like the name, composition of board of directors and business expansion are crucial in any merger and acquisition process. It all depends on the bank’s major or big promoters when choosing the entity to acquire or merge with.
Our strategy will be to enter into M&A with a bank with good strength and use our own brand name. We might have to go into one in the near future and we will consider these factors.
Bringing in a strategic international partner is a much discussed issue in Nepal’s banking sector. How serious is Prabhu Bank in bringing in such a strategic partner?
It is not that easy to bring in an international partner. Prior to deciding in bringing such partners, we need to study its viability and necessity. Customers’ size, country rating, the market size, existing policies including repatriation policies and exit policies, among others are key in this process.
International agencies consider these factors while partnering with any foreign institution. Looking into the current circumstances and scenario of the country, international agencies are unlikely to enter Nepal and partner with Nepali banks any time soon.