Current slowdown in credit disbursement is a temporary phenomenon
Bhuvan Kumar Dahal, chief executive officer of Sanima Bank, was recently elected the president of Nepal Bankers’ Association unanimously and will assume the office from January 4. Dahal, who is often regarded as a friendly banker, will lead the representative organisation of commercial banks at a time when banks are being criticised for only focusing on profit-making. Moreover, issues regarding interest rate volatility, security in the banking system and bankers’ unwillingness to participate in the social security scheme of the government have gripped the market these days, which Dahal says will be his key focus areas during his two-year tenure in the association. Against this backdrop, Sujan Dhungana of The Himalayan Times caught up with Dahal to discuss the issues facing the banking sector and his plans to cope with them. Excerpts:
Of late, credit disbursement from banks is dwindling as they are exercising caution. What is preventing banks from floating adequate loans?
If we analyse the data, the growth of loans is still higher than the growth in deposits. In the first four months and three weeks of the current fiscal, deposits in banks grew by Rs 110 billion, while loan disbursement increased by Rs 154 billion. Similarly, since mid-September, credit disbursement surged by Rs 23 billion while deposit collection rose by Rs 16 billion. But it is true that loan growth has been tepid compared to the same period of the last fiscal year. There are a few reasons behind it. Construction activities across the country have slowed down lately and so has the production of cement and steel as contractors are currently protesting seeking amendment in the Public Procurement Act and continuation of different projects. Along with this, the stricter income tax compliance adopted by the government and a sort of frustration in the banking sector following the arrest of banker and former chief executive officer of Bank of Kathmandu Ajaya Shrestha have also affected the mood. Banks have clear division of works on areas related to valuation, collateralisation and loan. Frauds are always smart. If a staff of a bank’s branch office is cheated or was himself/herself involved in the fraud, staffers in the head office of the bank will be completely unaware of it. The head office of a bank cross-checks the process and files and authenticates it. But the recent treatment of banker Shrestha has caused frustration among the CEOs as we now need to think twice before signing any document. Banks across the world follow principles adopted by the Basel Committee on Banking Supervision (BCBS), which is an association of central banks of different countries. As per BCBS, there are certain risks inherent in the banking sector such as related to credit, market, liquidity and operations. Recent issue of ATM theft and other hacking incidents in the banking system come under operational risks. Banks across the world have adopted a policy to put aside 15 per cent of their gross income to manage operational risks. Thus, we have a mechanism to bear losses that may be incurred due to such risks. It is not that the loss is passed down to consumers. Few errors are inevitable in thousands of banking transactions and banking sector can absorb such losses. While we should be penalised if our direct involvement is found and someone might cheat a bank by taking advantage of its weaknesses, but it is wrong to assume a banker is involved in every banking fraud. The judiciary in Nepal and the police administration are not very knowledgeable about the banking sector. But that is basically because the central bank and bankers like us have been unable to make them comprehend how the banking business operates. All these issues have certainly resulted in frustration and demotivation in the banking sector. But I see that the demand for loan is not going to slow down in Nepal as expansionary works are under way. The current slowdown in loan is a temporary phenomenon and will pick up soon.
Banks and the private sector often lock horns on interest rate issues. When will the issue of interest rate volatility be sorted out?
I think of the dispute between the banks and private sector on interest rate as similar to that between a house owner and tenants. It is normal for the lender to try to hike the interest rate, whereas for the borrower to seek lower rate. It is a natural process. We should be clear that interest rate is determined by demand and supply principle and banks have no role in controlling it. Moreover, the central bank has set 4.4 per cent spread for banks and we should comply with it.
One of the major complaints of the private sector is that the interest rate on loans issued at one point of time keeps increasing. Why is this so?
I don’t think this is the case at present though such incidents had happened a few years ago. We also should not forget that lending rate had come down to as low as 6.5 per cent at some point in time. It is a human tendency to take notice when the interest rate goes up, but not when it comes down. Banks had also raised interest rate on deposits to as high as 12 per cent, which is often not discussed. But as of today, the lending rate has been connected to the base rate of a bank. This means that if base rate increases, banks can increase their lending rate and vice versa.
Though you mentioned earlier that interest rate is determined by supply and demand principle, banks were once seen as promoting cartel in interest rate. What do you have to say on this?
Banks are not in favour of cartel. We cannot breach the interest rate spread of Nepal Rastra Bank. Cartel is often practised for profit-making. Had we practised it, our profit would have gone up significantly.
Banks have recorded a minimal 0.41 per cent operating profit before provisional growth in the first quarter of the ongoing fiscal though credit growth during the same period is almost 16 per cent. Had we practised cartel, our profit should have increased in line with rise in credit disbursement. We came to an understanding on interest rate at one point purely for the betterment of the economy and the banking sector.
Banks have expressed reservations regarding the new spread calculation method introduced by the central bank. Can you please elaborate?
We should not look into absolute volume of profit made by a bank but rather at its volume compared to the investment. We should clearly understand that the return on equity (RoE) of banks is 15 per cent. This means that if we have invested Rs 100, we are making profit of Rs 15. So, RoE of 15 per cent where the interest rate on deposits is above 10 per cent is certainly not high as so many risks are inherent in the banking business. If we calculate risk-free returns for banks, it is only 10 per cent. Once the circular on new spread is implemented, the RoE of banks will come down to 10 per cent. Targeting the banking sector stating its RoE is high brings to fore questions about other sectors where the RoE is even higher than 15 per cent. A strong banking sector is a boon for the economy. In fact, some economists have accredited our enhanced banking sector for Nepal’s improvement in the doing business index. It is not that banks should make extremely high profit but around 20 per cent RoE is not bad. We have requested the central bank governor and finance minister to reconsider the spread calculation decision. The allegations of banks only being profit-centric at present are unfounded as the RoE in the sector some six-seven years ago was as high as 22 per cent. Banks today have reached all nooks and corners of the country. Over the last three years, the number of branches of commercial banks has reached 3,935 from 1,895, deposit accounts have reached 24.2 million from 13.5 million, loan accounts have reached 1.08 million from 761,000, mobile banking users have reached 8.1 million from 1.74 million, the number of debit card users has reached 6.5 million from 4.3 million and credit card users have reached 137,000 from 55,000. These statistics show how drastically Nepal’s banking sector has been expanding and enhancing. It is rather unfortunate to be criticised though we are giving our level best for the development of the country and economy. Our banking sector is almost at par with international banks. They are ahead only in the technology front.
The market has been facing a perennial crisis of loanable funds since the past few years. How long do you think will the crisis continue?
The credit to capital plus deposit ratio (CCD) in the banking sector today is around 77 per cent. This means that banking sector still has the capacity to lend up to Rs 90 billion. Import has come down and export has gone up, while the balance of payments situation is positive. As credit disbursement has slowed down lately, we expect the liquidity situation to tighten a bit later this fiscal, probably from around mid-January. But if the demand for loan continues to slow, I even see chances of no liquidity problem this year. However, the demand for loans is bound to go up along with acceleration in development works.
To ease liquidity and assure availability of resources, NRB has allowed banks to borrow funds from foreign financial institutions. Is Sanima planning to bring in foreign funds?
We are currently in talks with a few international parties on this issue. But foreign financial institutions seek country rating and look into other issues to issue funds.
Where is Sanima Bank in the merger and acquisition process?
Personally, I am a pro-merger banker, as consolidation will have synergy effect. But merger may not work every time. We have formed a merger committee and it is searching for a suitable partner. Merger is not an easy job as the process has to undergo various cohesion and cultural issues between two firms. Janata Bank and Global Bank have recently merged. If this merger becomes successful, other banks will follow it.
Banks have been reluctant to join the social security scheme of the government citing biasness in the policy. Where actually is the problem?
Banks always support programmes of the government. Banks and its employees are already registered at the Citizen Investment Trust (CIT) and Employees Provident Fund (EPF) and these entities have been giving certain facilities to us and our staffers. Now the recent call is to switch to Social Security Fund from the aforementioned two entities but at the cost of the facilities they were providing. If the government is unable to improve on the facilities being provided by CIT and EPF, the Social Security Fund should at least provide the same facilities. Once this happens, we will certainly switch to the fund.