“We’re bringing products difficult to replicate by the market”
Sujit Mundul, CEO of Standard Chartered Bank Nepal, hints at what the bank is planning to do and shares his views on some of the current issues in Nepali banking sector. Excerpts:
How is the recent progress in StanChart Nepal?
The story of Standard Chartered Bank Nepal for the last two three years is a success story. As we all know, during the last two-three years the country has gone through a period of turbulence and the situation is still almost the same. As a result, the country’s economy has not been performing well. Despite that our bank has done extremely well. If you compare our bank’s growth rate with that of other similar category banks, you will find that our growth is not that spectacular. It was the result of a deliberate strategic decision.
We did not want to explode our books keeping in mind the prevailing situation in the country. It was based on the experiences in other countries that went through the kind of developments like Nepal is now passing through. All our stakeholders are very happy. From the shareholders’ viewpoint it is a bank that has been consistently distributing dividends and bonus shares. The price of our company’s shares is very attractive. All the performance indicators of the bank are highly encouraging. We are hopeful that we will be able to maintain this trend also in the days to come.
StanChart Nepal has been the leader in introducing new products. What new businesses (products) are now planned to be launched?
We are now trying to slightly move away from the traditional products, because it is very easy for another institution to copy the traditional products. We are now going to bring some value added products, particularly in the wholesale banking segment, which is very difficult to replicate. This year we will bring quite a few loan products, structured deposit products and some products from the global market which will help the financial institutions to manage their funds (their dollars, their nostro accounts) in a more yield-oriented manner.
What is StanChart Nepal’s experience in dealing in gold?
The experience is highly satisfactory. As you know that gold is a commodity and its price is internationally-driven and we have to keep that in mind. We are quite happy to continue this business.
How is StanChart participating in the proposed Infrastructure Bank in which most of the big commercial banks are participating?
I was present in the executive committee meeting of Nepal Bankers Association which discussed in detail about the equation of how much each bank or financial institution should have the equity in the proposed infrastructure bank. I talked about it within Standard Chartered Group. But, as you may know, our Group is not an institution that is willing to provide term-financial institution products. The proposed infrastructure bank is a term-financial institution like Industrial Development Bank of India (IDBI). Therefore, we are staying away from it due to the policy reasons. But we are very keen to participate in power projects and that is one of the growth areas we have identified for us. However, we will participate in such projects in accordance with our strength which lies specifically in corporate advisory, structuring debts and organizing international debts. We may also participate in short term working capital loans in infrastructure projects, which is a normal role of a commercial bank.
Do you see any flaws in the proposed infrastructure bank?
No. I think it is a very good venture and I’m sure it will become a very important institution in the country to drive growth, particularly in the power sector and the allied infrastructure sectors.
StanChart Nepal was also mooting a mutual fund and venture capital fund. What is the progress?
We are still very keen to do mutual fund. But we need to see the relevant laws, particularly the Trust Law. Such laws are yet to be introduced in Nepal. We are eagerly waiting for the introduction and enforcement of such laws. But again we want to say that due to the lack of sufficient investment opportunities, the fund may not be wholly placed within the country. Therefore, it needs to be placed partially in the neighbouring countries or elsewhere. The forthcoming laws should have provisions to allow us to do so. We are keen to go into such businesses.
StanChart together with some other big banks has a big amount stuck in Hyatt Regency Hotels. How is the progress in resolving the problems of this account?
I’m very pleased to say that we led the consortium of banks which have been financing Hyatt. Therefore, I personally was very deeply involved in the financial restructuring of the project. I think it was the first case of very successful restructuring to the date as the company is going ahead as per the restructuring proposal. So, till now it is a success story of a corporate turnaround.
How is your comment on the manner of the capital restructuring exercise for the sick units in Nepal? What good practices from elsewhere, including India, can be emulated?
For successful handling of the sick industrial unit, the best way is to have a proper Asset Management Company (AMC). For restructuring, a lot of expertise is required. We have to even import such expertise if needed. Such expertise may be in management or in technology. For any successful restructuring as in Hyatt, you should have in-depth knowledge about the industry, about management, about the technological support and so on. And such expertise should be available with your bank for different kinds of industry. In addition to that, the banks should be allowed to set up AMC. Standard Chartered has the experience of successfully running AMC in India. Also the court should be given proper authority to resolve the cases much faster.
There has been a big noise being raised about liquidity crunch in the banking system. How big is the problem?
There is no denial that there is a liquidity crunch in the market. Only the time will tell us whether it is short-term or medium term phenomenon. I personally think it is slightly longer than short-term phenomenon. So, this situation may drag another five-six months. To resolve this, there has to be a flow of funds back into the system. There are not only two or three but more reasons to cause the present situation. One of them is capital flight which has definitely happened. And the inflow of remittance has reduced. Also the banks have over lent. Majority of the banks have a C-D ratio of around 90 per cent. So, here the government and the central bank have major role to play to insure enough liquidity in the market.
How is your comment on the way the central bank is responding to the current liquidity crisis?
They have responded well to the problems. Though they have taken a bit longer time in coming up with the response, I think the time taken was for good reason. With regards to the liquidity crisis, I think it is more a macroeconomic issue which requires revisiting the fiscal as well as monetary policy. What they have done so far is like firefighting. More thought has to go into it.
Era of Competitive Banking
By Harendra J. Thapa
Nowadays, opening up a financial institution or a bank has become a fashion. It seems that the peace accord signed between the political parties with the objective of creating a “New Nepal”, has paved the way for sustainable peace and prosperity in Nepal. The entrepreneurs are encouraged to start financial services. Interestingly this sector has always prospered even when the country was passing through bad times.
Different views have sparked off with regard to the rapid growth in numbers of banks and financial institutions. Some perceive the numerical growth to have caused overcrowding while others are of the view that the number has nothing to do with the market as long as one can stand out in terms of performance and explore new market opportunities. This is a mere reflection of an era of competition in the banking sector of Nepal.
With the numeric growth of the financial entities, competition amongst themselves has gained pace. Nepal Rastra Bank (NRB) has banned the lottery system that several banks resorted to for attracting deposits. On the other hand there is the compulsion imposed on them by NRB to increase the capital base to Rs. 2 billion by 2010 when the foreign banks will be allowed to operate in Nepal through a branch. Thus, there is a challenge to profitably manage (invest) the capital increased and consolidate the position of the Nepali banks in the market tackling competitive challenge the foreign banks will bring in.
Accelerating competition has compelled the financial entities to devise appropriate strategies. As a result, waves of activities highlighted the banking scenario in the recent past thereby symbolizing the active participation of big or small players alike in the competition. As the new players are entering the arena, the existing new and old ones, regardless of their size or goodwill, are either into rapid network expansion or are deploying innovative ideas to mould and garnish the conventional products with attractive schemes.
For instance, four financial entities (Sunrise Bank, Bank of Asia, Kasthamandap Development Bank and Country Development Bank) commenced their operation from October-November, 2007. Nabil Bank simultaneously inaugurated nine branches across the country to become the country’s largest private sector bank in terms of branches. Vibor Bikash Bank and Clean Energy Development Bank have come up with innovative products with customer centric essence called “Vibor Super Yield Deposit” and “Prepaid Fixed Deposit Scheme” respectively. Vibor Super Yield Deposit yields 5 percent interest per annum and also awards 40 percent of the profit reaped from the investment of the deposit while “Prepaid Fixed Deposit Scheme” pays the interest on the principal well in advance of the maturity of the fixed deposit. The four travel-related products recently launched by Laxmi Bank also appear to be conceptually new in the market.
The ongoing head-on competition in the banking sector can be viewed as a good sign of economic progress. This has widened the scope of choice for the customers. We may see more money being loaned out to the sectors of infrastructural development like road construction, hydro electricity projects and agro based industries thereby supporting in the overall development of the country. The population in the under-banked regions will have more access to financial services with the network expansion of the financial entities. So the competition in the banking sector, as long as it is free from manipulative contamination, does augur well for the consumers.
Analysis of Telecom Divestment
Government decision of divesting its stake in Nepal Telecom has created much hype in the market. Though the decision itself was welcomed, pricing (floor price of NPR 600/-) and the mechanism (English auction) have been criticized from various quarters of the economy including retail investors (small investors).
This article attempts, although in brief, to explore the impact of divestment in the domestic capital market, utilization of divestment proceeds and analyze the rationality (irrationality) of mechanism and price set by the government.
Impact in the Domestic Market:
Low volume and limited number of rational market participants are the major constraints for healthy growth of the Nepali capital market. Nepal Telecom’s scrips will surely enhance the volume of the market which, in the long run, will broaden the breadth with more and more rational investors participating in the market.
NEPSE is dominated by banking and financial sectors companies. Theoretically, NEPSE Index is considered as the barometer of Nepali economy but irony is that more than 90% of the weight in the Index is from banking and financial sectors scrips. With Telecom scrips being listed in the NEPSE, the Index will be rationalized to some extent.
FII are the major driving force in the emerging markets like India and China. Though, FII participation in the Nepali bourse could be a distance dream at present, Nepal Telecom’s divestment has, at least, laid the foundation for attracting FIIs towards Nepal as this divestment may give them higher confidence about the economic liberalization policy of the Nepali Government.
This divestment will help the government usher in faster macro economic reforms that will go a long way in improving the figures of growth, deficits and tax collection in the years to come. And this will in turn have an indirect effect in the capital markets itself over the long term.
The capital market is also affected by the sentiment prevailing among investors apart from the fundamentals of the economy, industry and company. Telecom divestment will definitely play an important role to revive the morale of investors which is shaken up to some extent in the recent turmoil of NEPSE.
Utilization of Divestment Proceeds:
Government is all set to raise at least Rs. 9 billion from this divestment but there is a big question mark about the utilization of the proceeds. Though Finance Secretary (Revenue) has claimed that the proceeds will be utilized for infrastructure development in the rural area, there is equal chance of utilizing the proceeds for financing mounting budget deficit of the government.
How to Utilize the Proceeds?
If it happens as said by the Finance Secretary, it will produce better result for the future. But the utilization should be in systematic manner. The government should float an independent entity as “Divestment Fund” which is to be managed by an independent Fund Manager and all the proceeds from the divestment of Nepal Telecom and other public sectors enterprises should be routed through that Fund and utilized in various projects as identified by the government and planning commission.
Divestment Mechanism: Big Question
English Auction (i.e. highest bidder getting first preference) has been adopted for the Telecom divestment. Theoretically, English Auction makes economic sense because it ensures maximum return for the government from the sales. But it may not make social sense. And the government has some responsibilities towards society to fulfil. People believe (as does this writer) that this economic sense prioritized by the government over social sense will surely land in the hands of Nepal Telecom only cash rich people.
Instead of 100 % English Auction, government should have adopted different strategy. For example, it could have opted for English Option for 50 % of total divestment to justify the economic sense while the rest could have been sold off at Fixed Premium Pricing mechanism (even at a premium of NPR 500) to justify the social sense. Let us hope in the next divestment initiative, the government would give equal weight to economic as well as social objective.
Is Telecom Fairly Valued?
The government has set Rs. 600 as a minimum bid price for Telecom scrips. If reports are to be believed, there is no such excitement among the retail investors regarding valuation and mechanism adopted by the government.
But, in the personal opinion of this writer, Rs. 600 (floor price) is fair value for Telecom based on the financials published (see the table).
Note: (Financial data have been collected from application form for Telecom share and valuation is derived based on the financials. However, investors are advised to use their own judgment before investing as the writer or the New Business Age would not take any responsibility for any loss if the investors invest on the basis of this valuation alone.)
To sum up, Telecom divestment initiative undertaken by the government has brought positive sentiment in the market and at the same time, it has paved the way for divestment of other public sectors undertaking. However, in the future divestment initiative, government should value the economic as well as the social sense equally so that all quarters of the economy, including retail investors, will be equally benefited.
(Views expressed here are personal)
Figures in NPR “Crores” |
Particulars |
2004-05 |
2005-06 |
2006-07 |
Capital |
1500 |
1500 |
1500 |
Reserve & Surplus |
583 |
869 |
1272 |
Total Net Worth |
2083 |
2369 |
2772 |
No. of Outstanding Shares |
15 |
15 |
15 |
Net worth per Share in Rs. |
139 |
158 |
185 |
Net Profit |
354 |
493 |
627 |
Earning Per Share in Rs. |
23.6 |
32.9 |
41.8 |
|
Valuation Based on the Financials:
a. |
Based on the Net Worth |
Rs. 185 |
b. |
Based on EPS Model (Discounted @ 10%, assuming Zero Growth) |
Rs. 418 |
c. |
Based on P/E Model (Assuming Nepali Market P/E 30) |
Rs. 1254 |
d. |
Average Price |
Rs. 619 |
|
