“Forced mergers will not produce intended results even if the intention of the regulator is good.”

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“Forced mergers will not produce intended results even if the intention of the regulator is good.”

As the Covid-19 pandemic continues to affect all sectors, banks have also found themselves surrounded by several challenges. Over the past year, banks have endured disruptions in daily operations, reduction in income and decline in profits amidst high competition between the banks themselves. But at the same time, the banking sector is also at the forefront of the country’s economic recovery as one of the key components of the financial system.

Bhuvan Kumar Dahal, president of Nepal Bankers’ Association and CEO of Sanima Bank Limited, is of the hope that there will be a gradual recovery as the country’s economic engine gathers momentum in the coming days. In an interview with Sanjeev Sharma of New Business Age, he talked about challenges faced by banks, expectations of bankers from the next fiscal year’s monetary policy, the digitalisation drive in banking services and the ongoing standoff between bank employees and the Social Security Fund. Excerpts:

15 months on since its global outbreak, how has the Covid-19 pandemic impacted the Nepali banking sector?
The flow of credit, which had reduced sharply during the four-month lockdown in 2020, began to gather momentum from August-September (Bharda) after the government lifted the restrictions, and the situation had normalised for most business sectors by March-April (Chaitra). In the 10 months of the current fiscal year, commercial banks extended a total of Rs 705 billion in loans which is a 25 percent growth in lending of banks compared to the same period of the last fiscal year.

Similarly, imports and exports have grown by 22 percent and 32 percent, respectively, during this period. Also, the government’s revenue also increased by 22 percent in the 11 months of the current fiscal year. However, the operating profit of banks has only grown marginally; in the nine months of the current fiscal year our operating profit was just Rs 90 million, an increase of 0.12 percent, despite a 25 percent increase in lending.

After the start of the pandemic in March 2020, banks provided whatever support they could to their customers. Huge sums of money went into business refinancing facility as directed by the Nepal Rastra Bank and banks also reduced lending interest rates by themselves. We have supported borrowers to help them overcome the adverse effects of the pandemic. These measures have caused the interest rate spread to reduce from 5 percent over a year ago to 3.17 percent.

Observing the rebound in most sectors, we were very optimistic that the momentum of the country’s economic revival had gathered pace. But the second wave of the Covid-19 pandemic has dashed our hopes and banks will also be affected. Nevertheless, manufacturing activities haven’t been disrupted this time like in 2020 as many factories are operating, either fully or partially. While it may take longer for sectors like tourism to revive, other sectors will gradually recover from the crisis. At present, vaccination against Covid-19 is key to economic revival and the government needs to put all its efforts into this.

There are fears that the deferral and rescheduling of loans that banks have continued to do over the past year will cause a sharp increase in the non-performing loans (NPLs) of banks. Is this true?
In normal situations, banks would provision just one percent of their total loans. But our present loan-loss provision is 5 percent and banks are able to handle the current level of NPLs with ease. Rescheduling and restructuring of loans have been mostly done in the tourism sector. Banks have rescheduled and restructured the loans of tourism businesses for up to four years with hopes of their revival. But if the sector does not revive in the next 2-3 years, we will have to provision additional money as the current provisioning may not be sufficient. In such a situation, there will be chances of a big increase in NPLs.

In the last fiscal year when the total lending of banks was below Rs 400 billion, the total loan loss provision was Rs 19 billion. As we have a surplus of Rs 15 billion, I think the money will be sufficient to cover NPLs for the current fiscal year. We had started the process of write-backs in Chaitra observing the recovery on older loans. Now, as the second wave of the pandemic has created more uncertainty, the possibility to write-back loans seems to have ended for the time being.   

When the Covid-19 pandemic began, many people even those from the business fraternity said that the banks should not seek profit at a time of crisis. Now even as the pandemic rages on and bites the profit of banks, many argue that banks are not doing enough to support the struggling businesses. Do you agree?
Even before the pandemic, in 2018/19, the return on equity (ROE) of banks used to be 16.83 percent on an investment of Rs 100. In 2020, it came down to 12 percent. I don’t say ROE of banks is unsatisfactory. But we know how much the big business houses of Nepal earn as we are someone who knows their financial details closely. As banks are public limited companies with big business and are required to publish their financial reports on a regular basis, their profit is seen in billions of rupees. However, business houses do not have any such compulsion even though they make more profit than banks. Similarly, firms listed in the stock market such as hydropower companies and cement manufacturers also have ROE similar to banks.

Banks are also aware that they have to support businesses as well as the government in times of need. Last year, we provided interest rate subsidies of Rs 9.64 billion to businesses and contributed Rs 620 million to the Covid-19 Relief Fund.

Now with the easing of the prohibitory orders, economic activities have resumed. Which sectors will have higher demand for bank credit?
Before the second wave of the pandemic, demand for credit increased in most of the sectors except tourism. From construction companies to cement manufacturers, businesses were asking for credit as the low interest rate prompted them to avail cheaper loans. Auto loans, however, have not grown much in the current fiscal year.

Currently, many industrialists and businesspersons are getting bank loans at just 7 percent. I think the demand for working capital of industries and other businesses will grow as the second wave of Covid-19 has affected their supply chain. Past trends show that there won’t be much demand for loans during the period of Asar-Bhadra. Lending will increase from Ashwin (September-October) when the main festive season starts, and economic activities gather momentum.

While the government has announced a number of tax rebates for businesses of different sectors in the next fiscal year’s budget, it has not addressed the demand of bankers to reduce income tax for banks. Being huge profit-making entities why are banks demanding this?
As I said earlier, if industrialists and businesspersons get support from the government in difficult times, it also bodes well for the banking sector. But we have been asking the government to make policies related to taxation based on the principle of equality. If the government needs to raise more revenue, the tax rate should be increased also for trading firms. It is unfair to levy 30 percent income tax on banks, which is 25 percent for trading firms.

Raising income tax for trading businesses to 30 percent or reducing the tax rate for banks at once may not be possible. So, gradually reducing the tax rate for banks and increasing it for other businesses, whatever can be pragmatic to implement, could be the way forward. At present, the income tax rate for banks, and producers of alcohol and tobacco products is the same. Looking into international practices related to taxation, it can be seen that income tax rate for banks is on par with other types of businesses except in a few countries.

What expectations do you have from the next fiscal year’s monetary policy?
It can be expected that Nepal Rastra Bank will extend rescheduling and restructuring of loans for the sectors affected by the second wave of the pandemic. Similarly, the refinancing facility for hardest and medium hit borrowers is also likely to be continued.  

We are also facing the economic fallout of the pandemic like other corporate institutions. Despite the growth in business as indicated by the increase in lending, there has been a decrease in the income of banks. While interest rate subsidies and competition between banks to attract borrowers have been the main factors, the decline in our fee income has also played a part in this respect. NRB has set limits on prepayment, commitment, and loan processing fees. It is understandable that small borrowers should be charged less as many of them cannot negotiate with the banks in better ways and their financial burden should not be increased. This is not the case with big borrowers; they are strong financially and are capable enough to negotiate with banks effectively. So, we request the central bank to allow banks to charge fees to big borrowers on their own. This will increase determination and competition in the market.

NRB has directed us to focus on sectors including agriculture, energy and SME for lending. But as the second wave has affected economic activities towards the end of the fiscal year, meeting the targets set for these sectors will be difficult. So, we’ve requested the central bank to reconsider the targets.  

Banks have been spending CSR funds in scattered ways and they also have their own priorities in CSR. As per NRB rules, banks are required to spend such funds by themselves. If there can be an arrangement to channelise CSR funds through institutions like the Nepal Bankers’ Association, spending could be more effective. Together with the NRB, we could work to start impactful projects related to education, health and environment protection.

People have expected the central bank to come up with policies in the monetary policy to push banks into mergers. How do you think mergers should be done?
There is so much competition in the banking sector that banks themselves are going into mergers and acquisitions. Bank mergers have to be voluntary. Forced mergers will not produce intended results even if the intention of the regulator is good. A synergy effect has to come from the merger and forcing banks to merge will not create this effect.

The central bank can also explore other alternatives to make banks stronger. For instance, setting certain targets in parameters such as corporate governance and finance, and directing banks to meet the targets within a deadline (say one year) or face stringent penalties so as to improve the performance of banks.

The past year has seen an increase in the number of activities related to digital banking with NRB, banks and fintech companies coming ahead to promote digital products. Have the banks achieved their objectives in digital banking? And what about the readiness of bank customers to adopt digital financial services?
Banks were already working to develop digital products over the last couple of years. With the pandemic accelerating the necessity of digital systems, it has become more important for us to focus on digital banking services and banks are sincerely working towards it. We are also fortunate to have a central bank governor who is active in promoting digital payment and banking services.

Before the second wave of the pandemic, we had observed a decline in cash and cheque transactions, while the number of digital transactions was increasing. Also because of the Covid-19 related health safety reasons, we are promoting online bank account opening, fund transfer and encouraging customers to utilise digital services.

But still a lot needs to be done. Expanding internet services in rural areas and developing digital banking interfaces and payment apps in Nepali will be important in this regard. I think we are moving in the right direction and there will be some big changes in terms of digitalisation of financial services in the next 3-4 years.

In relation to the disagreement which has erupted between employees of banks and the Social Security Fund (SSF) after the latter took action against two commercial banks, bank staff are insisting that they will not join SSF under the current arrangements while the fund has claimed that they have addressed all the demands of bank employees. How do you think this complicated issue should be resolved?
The Social Security Act states that any employee will be entitled to receive social security benefits only according to their contributions to the fund. Provisions in the Act clearly show that joining SSF is not mandatory.

We have to acknowledge that SSF is a new institution and it is facing teething problems at the moment. The fund hasn’t still determined the interest rates on deposits and loans even after the amendments were made in the SSF Procedures.

Two of 27 commercial banks have already joined SSF. Some banks may join the fund in the future while others may not choose to. What we are asking for is to avoid forcing bank employees to participate in SSF which will damage industrial relations in the banking sector. Our calculations have shown that leaving the principal amount, contributors will receive pension returns of just 7 percent which is too low compared to the existing retirement arrangements.

Nepal Bankers’ Association is clear that the banking workforce must be taken into confidence as a large chunk of their income will be deposited in the fund as contribution. There is no need to push them against their will if they are satisfied with the current arrangements.

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