Donghyuk Kim
CEO, ILFC

January 2002 became a watershed month in Nepal’s banking history with two agreements signed: First for handing over the management of the largest commercial bank, Rastriya Banijya Bank, to an international accounting firm, and the second for IFC of the World Bank Group to participate in the equity of a private sector finance company, International Leasing and Finance Company Ltd. (ILFC). The CEO of ILFC, a joint venture with Korea’s KDB Capital Corporation, which in turn is a subsidiary of the Korean Development Bank, shares his impressions about the finance company business in Nepal and the likely consequences of ILFC involvement in this sector.

What are the likely consequences of IFC involvement in ILFC?

The credibility of the company will be enhanced immensely. In addition, we will be able to provide more advanced services to the Nepali public.

Would you like to share with us about the international business of KDB Capital Corporation?

Ten or fifteen years ago we started going abroad for the expansion of our business. First we went to Hong Kong. Then after we went to China, Japan, Thailand, Vietnam and Singapore. This Nepali joint venture was set up before Thailand, Vietnam and Singapore. But because of the East Asian economic crisis we had to close our JV in Singapore. Hong Kong is also not doing well. We had many non-performing assets there mainly because of the Asian financial crisis. And they are still suffering from the non-performing assets of the past. Despite a very struggling environment in Nepal we are doing quite well here. ILFC is one of the best companies in terms of performance among all our foreign joint ventures. Similarly our joint ventures in Vietnam and Thailand are also doing well.

What is your comment on the recent directives of Nepal Rastra Bank to the finance companies?

It is not affecting our company at all. A tie-up with IFC does not only mean signing a contract. They have so many clauses in the contract that we have to confirm to. Those clauses are much stricter than the guidelines of the NRB. Therefore, we don’t have problems with the NRB directives.

How do you assess the NRB directives?

Some of the clauses in the directives are not practical. For example, NRB has told the finance companies to maintain a list of single clients. It is not easy to collect the identity of all the relatives of our clients. I think, these things are very funny. Barring such few things, I fully agree with the policy of the NRB as they are trying to make the guidelines to conform to the international standard.

Looking at the way the finance companies have been operating in Nepal, what do you say about the possibilities of this sector leading to a South East Asia type financial crisis in Nepal?

I don’t think such a crisis will be there in Nepal. Because, first, Nepali economy is not so exposed internationally. Nepal’s exports are less than its imports. Nepal is not exposed to foreign currency crisis.

How do you see the share prices of the finance companies as compared to those of the commercial banks?

If you compare the stock prices of the finance companies with those of the commercial banks, you may say that the prices of the finance companies are undervalued. However, I personally feel that the stock prices of the finance companies are reflecting the actual picture of the companies concerned.

Why is it that the general investors don’t show much interest in investing in the shares of finance companies as they do in the commercial banks?

I personally believe in the market theory of demand and supply. If the stock price of the finance companies is comparatively lower than the commercial banks or other sectors, there must be some reason. If your question is, why the prices of the finance companies are lower than the potential I can just tell you that may be the perception of the investors towards the finance companies is not that favourable than towards the commercial banks. If it is true, we may call it the weakness of the finance companies and their management. But, how do we remove this weakness? We should show the actual performance of our companies, our strength to the people. We should pay the dividend continuously; we should show our growth prospects to the public. It will definitely help to boost the market price of the finance companies.

What challenges do you see in leasing business?

The challenge is the lack of a kind of the trust or faith between the clients and the financial institutions. Sometimes I see some kinds of the moral hazards in this country. Many times I have been asked by our clients why do we ask for too much collateral and keep too many clauses in the contract. I think that perception should be changed. Some clients even tell me that if the has offered a high collateral value compared to the loan amount the borrower has to obey what the bank or the finance company dictates. And if the bank extends a loan without any collateral then the bank will have to obey its clients. That is totally wrong. You know why do such kinds of things happen here? Because there is no system to keep a track record of the borrower. If somebody is bankrupt or fails to repay loan in time he should not be allowed to do any other business. But here, such person can easily start a new company and gets the loan from other banks. These types of things are prevailing here. First of all, these things should be changed.

Who should take the lead?

The financial institutions themselves. We should form a sort of cooperative environment. We should share the information with each other. We should have a kind of credit rating system. We should initiate it first and the policy makers should put in place some sort of comprehensive system. Some of our cases are pending in the judiciary for almost six or seven years. Still we don’t know when they will be finalized.

What other problems do you face?

Besides these things, we don’t have any other problems. General business challenges like stiff competition or other types of problems are there wherever you do your business – be it in Korea, Japan, America or elsewhere. As the number of finance companies is increasing, so we should keep fit for that kind of competition.

What type of legal problems do you face in Nepal?

In Nepal, if a cheque is bounced nothing happens to the issuer. But it becomes a criminal case in Korea. In case of promissory note it is not a criminal case, it is just a civil case. In case of cheque however, cheque issuer should go behind the bars. It is only with such a strong social system that the credibility among the financial institutions and the clients and the government is established. Except in Japan and Korea I don’t think that even the western countries have such kind of strong social system. The reason for them may be that they grew in such a kind of environment that if somebody fails to pay his promises he couldn’t survive in the society. They should go somewhere else. That’s why they don’t need to develop such systems. In the case of Japan and Korea, the history of their industrialization is not that long. Japan’s may be about 150 years long and Korea’s about 50 years long. Therefore, they could not import the system within that time. Therefore, without any severe penalty one doesn’t necessarily follow the rules. In western countries if someone’s cheque is bounced, no bank will again issue the cheque for that client. Therefore, the clients are more alert about it. But in Nepal the bank doesn’t seem to care even if the cheque may have bounced three or four times. Sometimes, the clients intentionally issue the cheques on empty account even if they know that they don’t have the balance in that account. This happens very frequently. Therefore, these things should first be addressed. In this kind of environment how can we work? Because of this attitude, many times we are very scared to provide the loans to even a very big company.

What efforts have you made to convince the authorities about the reforms needed?

They don’t need suggestions. They already have the ideas. For example, I’m told that the debt recovery act has been passed, but I have not been able to find the copy. We just need to push the authorities to monitor implementation of those things.

Would you mind sharing with us some major features of what ILFC and IFC have suggested to the government?

We have suggested one comprehensive leasing act including the legal terms and the rights and responsibilities of the lessor and the lessee.

In case of operating lease, which will be defined in the proposed comprehensive leasing act, the lessor should be allowed to depreciate the leased assets over the lease period evenly.

Since the existing procedures for repossession of the leased equipment are costly and time consuming, it is recommended that the lessor be given the right to repossess the leased assets without any legal action or recourse. Introducing well defined regulations on the lessor’s right to terminate the lease agreement should be considered, as well as the procedures in that regard in terms of a right for the lessee to cure his breach of contract within a given term of notice. A register like the existing land register should be created for leased assets to prevent the lessee from reselling or mortgaging or sub-leasing of a leased asset. In this context, clarifying the existing legislation on bankruptcy should be considered in order to protect the lessor’s ownership rights.

It is also recommended that the tax and custom benefits available to industry should be made available to lease finance companies as well.

What consequences do you see to this business in the face of the forthcoming new Income tax law and the provision regarding the prohibition of tax management?

It won’t seriously affect our future business.

As we understand, the beauty of lease financing business is in the facility for tax management for the lessor and the lessee. But the new income tax act has a provision that does not allow any plan that may reduce the tax burden of the taxpayer. Don’t you see any problem with this provision?

Regarding the new income tax act, I should say that unfortunately the suggestions that we had submitted for the facilitation of the lease finance business have not reflected in the final act. What we had suggested was that it should include the definition of operating lease, that in case of operating lease, leasing companies be allowed to charge depreciation proportionately in equal annual instalment over the lease period so that the total value of the leased asset shall be written off within the period of lease contract, that the operating lease rental paid by the lessee be tax deductible, and finally that the operating lease rental paid by the lessee should not be subject to the withholding tax.