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December, 2003 |
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Interview |
Himalaya SJB Rana, Chairman of Himalayan Bank Ltd., is closely watching Nepali economy ever since 1951 when he became the First Secretary of the Ministry of Finance and later the Founder Governor of the Central Bank. Excerpts from an interview with him on some comtemporary issues in Nepal's banking sector: What
is your comment on the recently issued directives of Nepal Rastra Bank
for blacklisting the wilful defaulters and the demand being made by the
business associations to relax the provisions? You
jumped from a question to which positive answer can be given to one to
which the answer can be both yes and no. As to your second question, let
me say that this circular that the Rastra bank has issued has become a
little controversial. The concept behind the issuance of this directive
regarding blacklisting is sound and there's nobody quarreling about
that. But the business community and some banks are wondering whether
the details of the directive have gone little too far. Yes, those
businessmen, industrialists or any borrower who take the loan from the
bank and willfully do not pay the interest or the installment of the
principle, deserve to be blacklisted. This tendency (not to repay the
loan) has been there for many years and that message has to be given to
the borrowers of banks. However, the directives require blacklisting not
only the defaulting company. It requires blacklisting also the companies
in which one of the directors of the defaulting company may hold some
shares. So, whether the impact of this has been deeply considered in the
question. Businessmen are telling us that if you apply these directives
very strictly, then it may be that 70 or even 80 percent of the business
houses would need to be blacklisted putting an end to the trading as
well as industrial activity in the country. That is not going to be good
for the economy of the country, for the government or for the banks. What
would be the reasons that the previous blacklisting provisions were not
effective? There
was this laxity on the part of the banks. Let us take an example of a
loan to a company of a Group. I say, this term Group has itself been a
misnomer. There's no Group commitment to service the loan if one company
in the Group defaults. They just call themselves belonging to a Group
but the separate companies in the Group are left to fend for
themselves. Since the bulk of the business comes from these big houses
what the banks did was that if any company belonging to one Group
defaults they applied blacklisting to only that company and they
continued doing business with other companies in that Group. But now the
new circular requires the bank to blacklist not only the defaulting
company but all the companies within that Group. Moreover, the new
directive also requires that if one bank blacklists one company of one
Group, none of the banks can now lend to any company within that Group.
You
blamed the laxity on the part of the banks to implement the previous
blacklisting requirements. But why cannot we say that Nepal Rastra Bank
itself was lax in doing its job properly? I
don't think you can blame the Rastra Bank. You cannot expect it to have
the manpower or the mechanism to monitor everything. What they can do is
this: while they are doing the inspection they can raise a question when
they find a bank continuing to lend to a blacklisted company. The
proposed umbrella act on banking is still at the proposed stage and
Nepal Rastra Bank has not been able to get it announced. Does not it
show that the central bank is not doing its job properly? The
Rastra Bank was ready with the draft law almost two years back and they
held an interaction with all the bankers on it. During the
program, some bankers and myself raised a series of points which needed
to be corrected. This was well received by Nepal Rastra Bank. They even
sent their lawyers and other persons responsible with the formulation of
the law to meet with me and review the points that I had raised. Then
they revised the draft together with the Ministry of Finance and
Ministry of Law and they submitted the final draft to the cabinet which
approved it and submitted it for the Royal Assent. But when I saw a copy
of the draft submitted for the Royal Assent, I found that there still
existed few fundamental points which needed to be reconsidered. So, I
wrote a petition to His Majesty pointing out the flaws in the draft and
asking for reconsideration. So the Royal Secretariat sent the draft back
to the prime minister who referred it to the Finance Minister. But as
the Finance Minister left for the USA for a visit, he asked the Finance
Secretary to sit down with us and find out what needs to be corrected in
the draft. So myself and the president of Nepal Bankers Association have
had a meeting with the Finance Secretary and the officials of the Nepal
Rastra Bank only on November 17. We have prepared a note which is a sort
of compromise on the part of both the bankers and the central bank. I
hope, the government will take final decision soon after the return of
the Finance Minister. Would
you mind sharing what were those important points that are reconsidered? The
draft had fixed the number of directors in a bank at maximum seven.
Though the number was fine, we felt that this number would not be enough
looking ahead for the possibility of mergers among banks. If you need
the board to have nine members after merger, it would be difficult to
execute the merger because of the limitation of seven. So we suggested
to raise it to nine. Secondly, they have come out with a very novel idea
that in the Board of Directors we should have professional directors
picked up from the roaster set up by the Rastra Bank. Well, we will have
to see how effective the professional director will be, but we accepted
it. But then the draft said that such professional director will be
among the seven. That would raise many problems in many banks because we
found that we already have seven directors. Whom to ask to quit? For
example, in Himalayan Bank, we have one from Habib Bank, the foreign
joint venture partner, one from the Employees Provident Fund, one from
the public shareholders and four from among those who have invested 51
percent. Now, to find the place for this professional director, whom
should we ask to quit? So, we have suggested that this professional
director should be additional to the seven or nine. There
was also another paragraph where they said that the interests on
deposits and interest on loan would be as fixed by the central bank.
Clearly it was contradictory with the concept of open economy. And there
also was a point that required the banks to obtain the approval of the
Rastra Bank before declaring dividend. We pointed out that such control
is already being exercised by the central bank under the directives it
has issued. Under this provision of the directive, we bankers have to
send our balance sheet to the Rastra Bank for its comments before we
sign it. The balance sheet contains all the things including the
proposal to issue shares as well as to declare dividends. But to state
specifically in the law that the bank needs the prior approval of the
central bank before declaring the dividend is a violation of the
fundamental right of an institution. In order to declare dividend it may
be required to comply with all the rules and the regulations of the
country, but in principle it must remain the prerogative of the bank
management to make the declaration. The
other point we raised was regarding the qualification fixed for a bank
director. They have prescribed in the draft that all the directors must
be graduate and they have fixed also the disciplines in which the
directors must hold the degree. I objected to this on the ground that to
become a businessman there is no qualification fixed. More importantly,
if you don't have to be a graduate to become the prime minister of the
country, then why is this degree required to become a director in a
bank? Then they wanted to change the provision in such a way that
two-third of the directors should be graduates. But this again was not
practical. Which of the non-graduate directors should we ask to quit so
as to meet the two-third requirement? So we suggested that it would be
acceptable if the requirement says the director should be either
graduate in any discipline or should hold so many years of experience in
business organization which has a paid up capital of Rs. 10 million.
This way the person who has a business experience of running a grocery
store would be excluded. We argued that if someone has been in business
with Rs. 10 million as the paid up capital for, say, five years, he
should be regarded as capable to be one of the directors of a bank.
Similar problem was with the other provision which required the chief
executive officer of the bank to hold a Master's degree in economics,
accountancy, law or something like that. This, I argued, again violates
the international practice. To enter the civil services in UK, USA,
India, Pakistan, Sri Lanka, Burma or anywhere, you are eligible if you
are a graduate in any discipline. I have met hundreds of bankers
as chief executives who are graduates in history or in natural sciences.
We appreciate the spirit behind specifying the qualification for a CEO,
but we think it would be better to specify the minimum years of
experience rather than the discipline of the degree. We suggested that
it would be better if we put it as graduate in any discipline but
experienced as an officer in a financial institution or a bank for at
least ten years. They have agreed to put it at five years.
The
idea of having an Asset Management Company (AMC) to tackle the problem
of the large non-performing assets (NPA) in Nepali commercial banks is
being questioned from the standpoint of possible moral hazards on the
part of the bankers and the monopsonic rights in the hands of AMC to fix
the price of the assets it takes from the banks. How is your opinion? You
perhaps unwittingly omitted to mention another measure taken to reduce
the NPA - that is the setting up of a special judicial court or Tribunal
to hear the loan recovery cases. So, now before filing a case in the
regular courts, the first step from the bank will be to file it with the
Tribunal. This law was passed after lot of follow up by us bankers. But
even after the bank wins the case from the court and takes the
collateral into its possession the bank may find it difficult to sell
the property, as is the case even today. The buyers simply do not come
forward. When they come they are very few and often they join hands and
offer a very small amount. There is a sort of a buyers' market here. So,
the AMC was proposed. At this moment I cannot say whether this AMC will
or will not work well in Nepal. Globally, there are mixed reports. As I
have heard, AMCs could not do well in Latin America while they did very
well in Thailand, Philippines and Malaysia. Our central bank people have
gone there (Thailand, Philippines and Malaysia) and studied how the AMCs
functioned there and they are trying to model the proposed AMC of Nepal
accordingly. But I think the success of AMC depends on the leadership of
the AMC. As
it is expected to be only one AMC operating in Nepal, how do you comment
on the possibility of monopsonic price fixation by the AMC for the asset
it takes from the bank? They
will not fix price. The asset will be in their hands and they are
expected to be trained in selling the asset in an efficient manner so as
to realize the maximum value. Under the existing situation, this
responsibility of selling the assets goes to the legal or administrative
department of the banks. But they are not trained in this function. A
team of World Bank officers who visited Nepal recently has floated an
idea (the excerpts were printed also in Nubiz) under which all of the
bad loans in Nepal Bank Ltd. and Rastriya Banijya Bank would be
transferred to one of them and all the good loans to the other and after
such transfer is completed the one with all the good loans would be
running as a bank while the one with all the bad loans would be turned
into an AMC. How do you comment on the idea? This
is news to me and my first reaction will be that it's an interesting
idea. If it is so, may be there will be two AMCs. May be this one will
come into operation first, because there are still different views going
around about the equity structure of the other AMC. Earlier, it was
expected that the government will put the entire equity. But now the
government says it will subscribe only about ten percent. And they are
now asking the member banks to subscribe. And there is not great
enthusiasm among the commercial banks to lock up their money in an AMC
of which the management will be in the hands of someone else. No one
knows who will be managing that. Anyone may be ready to put the money
only after the company starts work and shows good results. How
is your opinion about the NRB directive that requires the banks to raise
the Capital Adequacy to 12%?
Now
that we have more or less become a member of WTO, the banking sector has
to open up for investors from outside. So, our banks must be able to do
business in accordance with the international norms. So the directives
from the NRB have done a good job to bring our operations to the
international standard. Some of us are quite happy, though some others
may find it uncomfortable as they may not be operating as they should.
However, I think even some good measures taken with good intentions may
not sound good if they are mistimed. As to the capital adequacy, I have
come to know that 8% is the international standard. Then why 12% in our
case? Similar is the case with the requirement for the paid up capital.
People say that the central bank's directive to the banks to raise the
paid up capital to Rs. 1000 million is meant to raise the entry barriers
for the new banks. My view would be that instead of imposing such a high
capital requirement, the central bank should have the guts to say
"now in Nepal X number of banks would be enough" and then stop
granting any further license. Some
monetary economists have started suggesting to look for alternates to
the present policy of pegging Nepali Rupee to the Indian Rupee as the
Nepali exporters are being hard hit by the ongoing revaluation of the
Indian Rupee. What do you think? There
was very good ground for floating the exchange rate of Nepali Rupee
against Indian Rupee five six years back before the Maoist insurgency
started. Then the Nepali economy was growing comfortably and you could
also buy Indian rupees in the open market for Rs. 156 or Rs. 157 despite
the rate fixed by NRB being Rs. 160. It was not because our
balance of trade with India was favourable, but because of remittances
and unreported payments. My view will be that it's not the right
time to drop the fixed exchange rate system. If you let the market
decide the rate, the central bank must have enough resources at its
hands to influence the market so that the speculators would not be able
to influence the rate to their advantage. As you know, right now the
central bank does not have comfortable Indian Rupees reserve. By
the way, how are the banks being affected by the ongoing revaluation of
the Nepali Rupee and how are they managing this? This
has not been a major factor. But
one of the major sources of earning of the Nepali commercial banks has
been the exchange rate gain … The
rate of depreciation of Nepali Rupee has not been any significant source
of income for the Nepali banks. Rather it was the rate of interest. In
the past the Nepali banks used to get 4 to 5 percent when they parked
the foreign exchange in US banks. But now it has come down to 0.5%. The
importance of remittances sent home by the Nepali workers from abroad is
growing in the economy, but the money so received is felt to be used
mainly for consumption, that too in conspicuous consumption. What do you
suggest to create the mechanism necessary to utilise this for capital
formation? The
kind of remittance that is coming into Nepal is not of a significant
magnitude as yet. What these people earn is just enough to meet their
social obligations and consumption needs. What
do you see as the future of banking in Nepal particularly in the short
and medium term? In
the short term, they have threats. Up to now, almost all the banks are
operating efficiently and earning a lot of money. They are paying
handsome dividends to the shareholders. Therefore, the price of their
shares has gone up. Now, if we look for next four years, I think it very
much depends on peace and security situation in the country. If the
situation doesn't improve in the next two or three years, then only the
top layer banks will survive while the other banks and the finance
companies will find it very hard. What
do you suggest as the survival strategies for them? One
is merger. They have to realise that the golden years are gone. In the
next two years, I think, there will be a day of reckoning for all the
banks. I hope there will come the 'insurgency fatigue' within next two
years. I think there will be talks held and some agreement reached.
Though, I do not know whether such talks will be led by this party or
that. Then we have to see who will come to the power and what sort of
economic policy there will be. To survive till then, the smaller banks,
financial institutions would have to reduce the administrative cost and
become very careful in extending the loans because borrowers may not be
able to pay back the loan not because of their bad intention but because
they cannot sell their products in the market. In
an apparent bid to deploy their fund in less risky areas, the banks in
Nepal are increasingly investing in hire purchase deals and thereby they
are almost invariably helping the growth in the consumer durables
industries in foreign countries. What do you suggest as policy measure
so that this instrument would be used for creating more jobs within the
country itself? You
can view a subject from so many angles and the perception from some
angles may be valid. But the banks are going not for hire purchase. We
call it consumer financing. This is the wave now everywhere. When
we do consumer financing, they will borrow money to buy cars. Banks are
not doing this because they have great love and affection for the KIA or
Suzuki. This is because new industrial projects are not coming up. In
India, car financing has been very very successful because of the growth
of the economy and the expansion in the middle class population. In
Nepal, home loan has been more popular. Little bit of hire purchase is
also there for the professionals. If the economy grows, this kind of
consumer banking will grow further. It is done by the bank solely to
make use of the resource in the hand. What
do you think of the criticisms raised from time to time by some quarters
for handing over the management of NBL and RBB to foreigners? This question is being
asked to me frequently during the last three four years. My answer is
that in the banking sector, we have professional who could take care of
the problems of both of these banks. Nonetheless, I support this concept
of having foreigners to manage these banks, at least for few years. This
is because, I realize that Nepal is a very small society, and everyone
here is bound to each other by friendship or other relations. So it
would not have been possible for Nepali professionals to take strong
dispassionate decisions. Even then it is also true that most of the
people who are in the management teams in these two banks are Nepalis. |
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