Service delivery key

Financial sector is emerging as a driving force for promoting economic activities and national growth. The momentum needs to be sustained over thel long-run by improving the sector’s management and service delivery. Reforms in Ratriya Banijya Bank (RBB), the largest commercial bank in Nepal, will have a big impact on the overall financial system. Today the bank has a more ‘vibrant’ and ‘compatible’ human resource and uses new technology. RBB has reduced its Non Performing Assets (NPA) in two years time from 57.6 per cent in July 2004 to 48 per cent in this fiscal year. In the past two years, RBB has a made a profit of Rs 1,100 million in 2003-04 while it was at a net loss of Rs 4,839 million in the previous fiscal year 2002-03. The profits are likely to go up in this fiscal. Within the past two years, the bank has already recovered Rs 5.5 billion in cash while Rs 5.8 billion loan has been restructured. Altogether, more than Rs 11 billion has been recovered. Banks and financial institutions need to make service delivery effective while abiding by the rules and regulations of the Nepal Rastra Bank (NRB). Banks should be efficient to generate good profits and serve customers with loans in low interest rates to sustain.

For the overall health of the financial sector, financial institutions need to take the following steps:

• Follow risk management guidelines.

• Assess internal control to limit risk.

• Make human resource vibrant.

• Expedite service delivery.

• Make easy procedures for borrowers.

• Convince borrowers to repay loans.

• Maintain credit standards.

• Make internal audit capability.

—Bruce Henderson, Chief Executive Officer, RBB

Ensure continuity

As banks need to keep pace with the rapid change in technology, they should be allowed depreciating investment on technology related assets in three to five years on a straight-line basis, without any tax charge back. The discriminatory tax rate of 30 per cent on financial institutions should be immediately reduced to 25 per cent. Due to difficult economic and security problems, Non Performing Assets (NPAs) are likely to increase in the banking sector. The NPA limit for tax exemption needs to be lifted. Interest on home loans taken by individuals should be a deductible expense for income tax purposes. This will encourage savings and investment.

Other suggestions:

• Interest on CRR balance must be paid to encourage banks. Effective financial sector reforms require that this group of players appreciates the virtues of financial discipline. Besides penalizing willful defaulters, checking excessive borrowing and enhancing disclosure levels are necessary to ensure sustainable financial health of borrowers and lenders alike.

• NRB should bring a calendar for government borrowing.

• Frequent changes in the open market operations policies (Stand-by Liquidity Facility (SLF) rate/limit and security margin), at times against the announced monetary policy, are causing difficulties to plan and formulate strategies.

• There is a need to bring guidelines on minimum anti-money laundering (AML)/know your customer (KYC) requirements to be followed by banks that will help in reducing cash-based transactions.

• Introduce electronic clearing system

• Issue prudential guidelines/directives to discipline large borrowers as they form an integral part of Nepali financial service industry.

—Sashin Joshi, CEO, NIC Bank.

Judicial reform must

The ‘first and foremost’ thing needed for the sustainability of the financial institutions is to reform the ‘judiciary’. Banks and financial institutions are in the highest tax bracket of 31.5 per cent, while their contribution to the economy is simply crucial. Regulation of financial markets should be done in a prudent manner. There are a lot of professional players in the financial market who can survive if the ‘environment’ allows. However, some of the players are indulging in unhealthy competition, which should be controlled through policy guidelines.

There should be a provision for introducing new instruments to reform the financial sector, to be traded through securities’ market such as corporate issuance of bonds, transactions of mutual funds in second country, which will ultimately open a wider horizon for investments. These initiatives will also make transparent any capital flight. A strong and independent credit rating agency is also required. The government should not dictate interest rates, but allow them to work freely through the market. As a member of World Trade Organization (WTO), financial market needs to comply with Basel 11 accord to be competitive and strong. As finance companies also act like mini-banks, they all are trying their best to survive under these tough days. Financial institutions like banks should be allowed to undertake investment-banking products to sustain their businesses. Incentives are required to make finance companies more competent. Reforms introduced by the central bank are obvious. However, the bad debts of some financial institutions have been a very challenging problem to deal with, despite these reforms. It will continue to be a challenge unless legal reforms are implemented.

—Siddhant R Pandey, Executive Director, Ace Finance Company.

Implement legal code

The GDP growth rate has fallen short of the aimed mark. The inflation rate has crossed the anticipated limits. The failure rate in the tourism sector and decline of export sector, are matters of concern. This is going to affect the balance sheet of banks and will hurt domestic employment generation. There is a risk of capital flight if interest rate arbitrage continues for some period. The central bank is taking initiatives for correction of aberrations in the system, sustain sick industries and spur growth. More is yet to be done in implementing policies.

The monetary policy should address the needs of genuine sick industries practically, allocating

bigger funds. The current arrangement of availability of refinance for sick industries needs to be revisited to make it available for a medium term/long term requirement. The banks go for capital investment and project financing, which will spur growth. Currently, banks are focusing

on consumer loans to mitigate risks of long-term lending. For financial sector reform, corporate governance is a key issue. A number of ethical codes mooted the central bank for good corporate governance, should be implemented. Conflicts of interests in bank management need to be identified and checked in time to keep the competition at a healthy level. While the credit risk is the primary risk in the banking industry, operational risks are also not adequately managed and internal control mechanism are not in place. Stakeholders must realise that good corporate governance helps reduce costs, mitigate risks and ultimately increase shareholders’ value. If we can not improve the corporate governance practice and bring improvment in our management culture, the problems in the financial sector will be recurring and cyclical.

—Shovan Dev Pant, CEO, NB Bank.