Nepali Times
"Capital adequacy is going to be a problem..."

Nepali Times: This is your 10th anniversary year. How is your bank doing?
Himalaya S Rana:
The bank has been doing well. Our ninth annual report is just out and we have been successful in collecting over Rs 17 billion as deposits, the highest among joint venture banks, even higher than Standard Chartered and Nabil. Similarly, we were able to extend credit worth over Rs 9 billion, which is also the highest amount lent by a joint venture bank. Profits went up by 40 percent, we were able to announce a bonus of 30 percent to shareholders and for the last fiscal year we gave a dividend of 27.5 percent. We were the fourth joint venture bank, and those who begin earlier have a head start. We were ranked as the number two bank in Nepal by Asiaweek, which recently listed the top 500 banks in Asia.

What are your major investments?
We are essentially a commercial bank, which means that our bread and butter comes from opening LCs (letter of credit) for imports and exports, and then guaranteeing performance for commission. We are not an investment bank in the sense that we don't buy shares, we don't subscribe equities in other organisations. We lend to various sectors, most for industries.

Which sector among industries?
Iron, steel mills. almost all industries, the tourism sector, which is hotels and airlines. Our exposure to the tourism sector is only 22 percent, which has not brought us down. Those banks that have lent heavily to the tourism sector have to be careful now.

You also have some very bad consortium loans...
Most consortium loans are not doing well, we have almost taken a decision that we will not join a consortium unless we lead it, because there are many pressure groups in Nepal and when there are four or five banks, some group can always apply pressure on one bank or other. All right, all businesses do not succeed, all businesses cannot become profitable. When you recognise that, then we have to say "all right, we will close the deal". But then there are pressure groups and there is always one bank or the other opposing that and we cannot take the desired action.

You've been quite successful, what decisions would you say were critical to your success?
One was the decision to attract deposits. One very successful product we introduced was for our savings accounts-if the account holder dies accidentally, we pay to the heirs four times the deposit amount, subject to the ceiling of Rs 500,000. Every month we hold a lottery and there are 19 prizes, sometimes we gave gold coins, sometimes watches, sometimes cash vouchers, so our savings accounts have been very popular. I think current accounts mostly go to the older banks, embassy accounts and INGO accounts also. Our deposit mobilisation has also been very successful. We then introduced tele-banking. It was not a resounding success, but it has also attracted customers, as it saves a lot of time. We have also been leaders in introducing new products, new technology, ATMs and our own Himalayan Bank credit card.

On the surface, all private sector banks seem to be doing fairly well. How much of that is due to the poor performance of public banks?
Obviously, we have benefited from that. Even now Nepal Bank Limited is a giant. It will not go into liquidation, but can be turned around. But this bank was modelled after British-Indian banks in India, tokens, waiting and all. When the joint venture banks came-Nabil was the first-modern banking also arrived. The NBL and the Rastriya Banijya Bank should have changed operations, but they continued with old practices. They didn't change. Anand Bhakta Rajbhandari was at NBL for 29 years, and he knew the credit worthiness of each party and made loan decisions accordingly. After he left, pressures were applied, loans were extended to parties who were not really business people. With bad loans, you either have to recover them or write them off if they are beyond recovery. Nobody had the courage to do that and they have piled up. But then they still have their network and depositors who still have confidence in the bank. I think it can be turned around.

What do you have to say about the role of the central bank while all this was happening, in terms of monitoring and supervision?
It has always had the operational freedom to inspect and supervise. When the joint venture banks came licenses were given one after the other even to parties who didn't have a good reputation. It was difficult to inspect and supervise the increased number of banks. There was some kind of a complex, because when I started at the Nepal Rastra Bank, I said that the salaries of its staff should be 25 percent higher than government salaries. Later on they were made the same. Then the joint venture banks came and maybe the sons and nephews of some NRB senior staff members working in these banks began drawing a higher salary than them, so there was some sort of inferiority complex. All these years they have not been successful in timely inspection and regulation. The NRB is very much present, but its effective presence has not been felt. But things are changing now.

How would you rate the NRB's supervision of banks run by the private sector?
Central banking and commercial banking are slightly different. I was a central banker, a Ministry of Finance man, Prithivi Bahadur Pandey was a central banker and did a stint as general manager of the RBB. Commercial banking has now become very complex. One thing lacking in the NRB is that they do not have people thoroughly conversant with the fine loopholes in commercial banks. They have a few top people who are quite knowledgeable, but the middle level staff isn't. Inspection will take place, but if the report will come after six months, what is the use? Things are changing, though. Now we have a dynamic man in charge of the banking operations, and he has always made his presence felt.

Is a committed governor at NRB enough to bring about change?
The question of autonomy for the NRB is very much in context. Out of 12 governors only three have stayed for their full term. Nine have somehow either been dismissed or had to leave. That being the case, the top management of the bank was a little diffident about putting their foot down. Especially after democracy, everybody started having connections and the best thing was not to ruffle feathers-that was the attitude.

How would you rate the new NRB directives?
The nine directives are welcome because they were issued to ensure that commercial banks operate under regulations in line with international standards. The basic concept behind it is welcome. But in this world you have both supersonic jets and bullock carts. They have taken norms from the Bank of International Settlements in Switzerland. That is a very developed economy. Let's take the capital adequacy ratio here-it was eight percent before, this financial year it has become nine, next year 10, then it will be 12. Ten percent is not there in India or Pakistan even. To apply norms taken from a very developed to a country like Nepal, this is one place where they should have been more careful. Capital adequacy is going to be a problem for many banks now. Because of that we have decided to raise Rs 360 million from the market to augment our supplementary capital. You have to seize the bull by the horns. Next fiscal year we are going to issue Rs 260 million worth of rights' share and raise our capital by one billion rupees. We started with Rs 240 million authorised capital and Rs 60 million paid up; now our paid up capital is Rs 390 million.

Does this mean some banks could close down in the future once enforcement becomes stringent?
They will have to tackle that problem. The directives are welcome, but they should have been fine tuned looking at the state of our economy and our banking practices. Secondly, the timing was not right-when there is downturn, when we are finding it difficult to get interest payments and instalments of loan payments from clients. to come up with new regulations now was not right. Now if the payment is not made on the due date, you have to immediately set aside 12.5 percent as a possible loan loss provision. So the loan loss provision is going to be huge, which means we cannot extend credit with that money, so the opportunity to make profit is less, because you cannot use that money for business.

Has the central bank been fair in enforcement so far?
We were wondering whether the directives would be enforced professionally. If two or three actions that they have taken is an indication of what they are going to do, they have applied them fairly.

What advice do you have for people trying to reform the financial sector?
I think we have to encourage professionalism in decision-making. Leadership is very important. In the central bank, it is not easy for the governor to assert his leadership, because he is aware that only two or three were able to stay there for the full term. But now under the new act, the governor cannot be removed for "exigencies," which were never defined. So that gives a sort of security to their tenure. I think (the present governor) is a man with guts, so we are hoping that things will improve.

People are talking about Nepal going the Argentine way if something is not done to shore up the financial sector. Would you agree?
That applies more to public finance. I am really worried. As far as the banking sector is concerned, it will not go the Argentine way, but government's regular expenditure has gone up and up. On top of that there is this campaign against the Maoists. When economic activities are not increasing, revenues are going to come down, so how is the government going to meet expenses?

Now on the general investment climate, would you put money into a major project now?

How bad is the investment situation?
Apart from bureaucratic tardiness, corruption, etc, what many people are not realising is that the basic thing is law and order. You can perhaps get 13 percent interest in Nigeria or Colombia, but people put money in Swiss banks even when they do not get interest, because at least the capital is safe. For six years we have had violent political activities. Industries have been attacked, and tourists have stopped coming. I was in Bharatpur, I went to Narayani Safari and there not a single customer and they were beginning to fire staff. You got to the Hyatt, you will see how it is. Unless the law and order situation is resolved, we cannot even dream of foreign investment, even local investment. On top of that something else has happened (capital flight). When Madhav Kumar (Nepal) said let's have a sealing of Rs 1 million (on property), about Rs 2 billion was withdrawn from here. Now with the voluntary tax declaration scheme, even though it was meant to bring those who had not been paying taxes into the net and tax payers needn't have been worried, the publicity given and the action taken was like spraying pellets from a 12-bore gun. They sent a letter to me also. Everyone was scared and again Rs 2 billion more was withdrawn.

(11 JAN 2013 - 17 JAN 2013)