How would you characterise the first half of the fiscal year for commercial banks?

We generally rate the performance of commercial banks on the basis of the Camels rating. Their soundness is judged on the basis of the capital adequacy ratio, assets quality, management competence, earning, liquidity and sensitivity to market risk, among others. Based on these parameters, 29 banks have met the requirement of Nepal Rastra Bank (NRB) with regard to the capital adequacy ratio. If we look at the asset quality, only 10 banks have non-performing loans (NPL) of more than 3 percent while 21 banks’ NPL is less than that. It shows that the banks’ asset quality is good. And when we look at their earnings, they have generated around 17 percent return on equity during the first half of this fiscal. Only one bank has reported a loss. Considering liquidity, most banks are now flush with money, and liquid assets to deposit ratio is above 30 percent. Similarly, the market risk of most banks must be negligible. This shows that banks are in a comfortable position as of mid-January 2014.

But bankers say they are struggling in terms of business expansion as the banking system is flushed with excess liquidity while the government is struggling to expedite development expenditure.

When we talk about surplus liquidity, the surplus amount is only around Rs 50 billion. And if we have a stable government in place, we will need huge resources for infrastructure development. And this surplus will turn into deficit. Currently, depositors are not getting the interest rate they’re supposed to due to a liquidity surplus. The country’s inflation is around 10 percent while even fixed deposits aren’t fetching 10 percent. This means the losers are the depositors. And as a result of that, extravagant spending might increase which is risky. Also, chances of capital flight cannot be ruled out. But a liquidity surplus is not huge amount, and if NRB comes with some instrument like reverse repos with which they are mopping up around Rs 19.5 billion each time, the extra money will be used up. If additional reverse repos of Rs 40-50 billion is done, the surplus money will evaporate. It’s a short-term surplus. If we get big projects, we won’t have adequate money to finance them; we will need to get it from other countries. So it’s not a big problem. It can be resolved by using short-term monetary instruments.

Banks have managed a 17 percent growth in their net profit in the first half even when they had to struggle to manage liquidity. How have they managed to achieve such a handsome profit rate?

Actually, it is not a handsome growth. Last year, the growth rate of banks in the first half was almost 50 percent. Profits got hit because of stiff competition and excess liquidity. Now, there is pressure to reduce lending rates every day. In case of deposit rates, banks have also reduced them. Even the returns on treasury bills are just 0.1 to 0.2 percent. You have to allocate at least 20 percent liquid assets, but you are maintaining 30 percent because you don’t have other instruments to invest in. Hence, 30 percent is virtually generating nothing. In case of 70 percent too, there is tremendous pressure to reduce the rate. As a result of that, the interest spread is always under threat, it is being squeezed day by day. Due to this also, profit growth was limited to 17 percent this year.

The central bank and bankers are at opposite ends when it comes to the spread rate ceiling. What’s your take on the spread rate row?

Interest spread capping, according to me, does not encourage innovation. If you are the best bank, customers will be interested in parking deposits at a lower rate. And if you are the worst, depositors won’t come to you even if you offer 12-13 percent. If your products are attractive on the lending front, they will come to you even if you price them a bit higher than other banks. According to NRB, the interest spread should not go above 5 percent. Though the rule has been introduced with the positive intention of reducing financial intermediation costs for accelerating economic activities in the country, I feel it is against innovation and not necessary in Nepal where almost 200 banks and financial institutions are competing with each other and their return on equity is also not high. Sometimes, I wonder whether banks are being penalized for being transparent.

There are so many factors. When I have to open a bank account, I will look at safety first, then convenience and then only comes the issue about return. When your income is confined to less than 5 percent, this will discourage innovation. Also, because of this spread rate capping, banks will not be encouraged to open branches in rural areas because operational costs are higher. Plus, competition is so tough that profits have declined from 50 percent to 17-18 percent. That itself says competition is so tough that such a regulation is not required in this regard. Many banks already have a spread rate of less than 5 percent. Some banks generate a higher spread rate because of their long history and efficiency, and I think we should not discourage that.

How do you see the next six months for the banking sector?

I think the current trend will continue in the next six months. We have a tendency of spending money in the last quarter. The government has currently around Rs 70 billion in its treasury, and it will be spent normally in the last quarter of the fiscal year. Again, liquidity will be in surplus. Loan disbursement will take place gradually because it cannot be sanctioned overnight. I guess the surplus liquidity will continue till January unless NRB mops it up with some monetary instruments. Despite the adversities, we are recording 17 percent growth which, though much less than last year, is not bad either. I think banks will be managed somehow in a professional manner and their annual return will be around 20 percent.

But don’t you think that the promoters may not be enjoying the rate of dividends they used to get in the past?

That’s for sure. And it is because of the competition again. Our 30 percent money isn’t generating anything today, but may be from next year it will start generating something if our economic activities start accelerating again which should push the returns slightly up.

As the new CEO of the bank, what are your plans?

Sanima is already one of the best banks in the country. Our capital adequacy is almost 14 percent, one of the highest in the industry. If you see the assets quality of Sanima Bank, the NPL is just 0.10 percent which is the lowest in the industry. Our return on equity in the first half is around 16 percent which is at par with the industry average. And we have surplus liquidity and market risk is being efficiently managed. We have been continuously increasing both the domestic and international networks and the customer base is increasing at a fast pace. Our bank is one of the best in terms of corporate governance, and our staff are endowed with the required quality and skills. Yes, in terms of balance sheet size, we need to grow further. Hence, we are restructuring all our branches and head office in terms of human resources. We want to grow without compromising on risk. We will focus on human resource management and technology to achieve balance sheet growth.

When I was the chief financial officer at Nabil Bank, a five-year plan was drawn up by my department with the assistance of a foreign consultant. Nabil was always number two in terms of profits, we had a brainstorming session and we drew a five-year plan in 2008. By 2009 itself, Nabil became number one in terms operating profit before provision. And for the last six years, Nabil has been number one with the nearest rival well behind. The bank which used to be ahead of Nabil is far behind today. That experience I carry from Nabil. We know what we need to do to add bricks to the existing solid foundation. I am sure the professional Sanima team will take Sanima to newer heights.

Nabil is a large bank while Sanima is a medium-sized bank. What are the differences you see in Sanima?

Nabil is a large bank with a history of three decades, while Sanima Bank has a history of just a decade. Hence, the difference in terms of size is natural, but we are better in terms of key parameters explained above. Similarly, the most beautiful thing about Sanima is that it maintains the highest standard of corporate governance.  

What are the areas that will contribute to the growth of banks?

E-banking will be a major growth area. Banks will have to bring in technology-based products. Likewise, infrastructure is another area where we have a huge scope for growth. Also,

the central bank has identified productive sectors—agriculture, energy, tourism and SMEs. These are the areas we will focus on and where there will be growth.