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November, 2003 |
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Market |
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Limping Forex Market
An explanation why Nepali banks have to maintain high spread on foreign exchange transactions "Whenever
there is a rainfall in India, we have no option but to open our
umbrellas here". This is a commonly used statement among the
so-called foreign exchange dealers of Nepal, including myself. There is
no doubt that our currency (NPR) is pegged with Indian Rupees (INR) and
because of which, our actions are limited to following the trend of INR
against US Dollar as far as determination of exchange rate between NPR
and USD is concerned. If there is any factor which effects Indian dollar
rupee market, then it has a direct impact on USD/NPR exchange rate in
Nepal. For example, if there is an increase in foreign direct
investments (FDIs) in India, INR becomes stronger against USD with the
help of increase in dollar supplies in Indian market. Then NPR too
becomes stronger. Similarly,
if Reserve Bank of India (RBI) intervenes in the market by buying excess
US dollars in order to protect Indian exporters, Nepali exporters are
protected as well, by default. Or if there is a soaring demand of
dollars among Indian multinational corporates, especially to import raw
materials, it raises the demand for USD, which leads to appreciation of
USD against INR and again we have no choice but to follow Indian trend
and appreciate USD against. There
could be many more similar examples, where Nepali forex market is
heavily dependent on Indian market. However,
this reliance over Indian market should not be considered as an excuse
for maintaining a very primitive domestic foreign exchange market. All
seventeen banks were quoting the same USD/NPR rate until few months
back. Now, with foreign management in them, Nepal Bank Ltd. and Rastriya
Banijya Bank have decided to quote their own rates to the customers.
Still the remaining fifteen banks have continued with their old practice
of uniform USD/NPR rates. The decision of two banks to break away from
this understanding is not surprising at all. When
I shared this fact, some time ago, with one of my counterparts with ABN
Amro Bank of Bangladesh, it apparently became a good lunchtime joke for
them. "How can all the banks quote the same rate? What kind of
understanding is this? Where are the market forces?" These were the
few questions asked by my Bangladeshi friend with a completely amazed
feeling about the Nepali market. But
the reality is, with the current situation, there is no option but to
have an understanding among the banks for quoting the same rate for US
dollars. What
is the situation like? In management, "Contingency" or
"Situational" approach is becoming more and more popular,
which applies to forex market as well. The biggest problem is that Nepal
Rastra Bank does not have an "Open Window" system. If any bank
is short or surplus of US dollars and if there is no demand or supply of
US dollars in the market, banks normally request Nepal Rastra Bank,
through Foreign Exchange Dealer's Association of Nepal (FEDAN), to
intervene in the market, either by buying or selling US dollars. In such
case, banks, in the past had to wait for as long as two weeks to buy or
sell their respective positions. This is one of the primary reasons for
a high spread of 60 paisa between buying and selling rates of US dollar.
Business
communities are comparing the exchange spread of Nepal with India, and
are complaining about the higher spread back home and accusing Nepali
banks by saying that there is a cartel among banks as far as quoting of
foreign exchange rates is concerned. Cartel is definitely not a baby of
the perfect market. But the big question is whether our market is a
perfect one or not. The answer is "Definitely Not". OPEC is
the best example of a Cartel, which is being practiced openly because
the situation demands for a strong understanding among the sellers as
far as pricing of oil is concerned. With
the above-mentioned deficiencies, our forex market is absolutely
"Imperfect," and as "Contingency Approach" suggests,
we need to have adjustments introducing some deviations from the perfect
market situation, and one of these deviations, which is rather a desired
one, is having an understanding among banks for quoting the same USD/NPR
rates across the board. If there is non-existence of basic
infrastructure in forex market, nobody should expect banks alone to burn
their fingers. Corporates
need to understand two very important factors in this regard. First,
there are lower volumes of foreign exchange transactions in our market,
which compels banks to charge a higher spread in order to earn a desired
margin. Second, as Nepal is an import-based economy, most of the banks
are buyers of foreign currencies on behalf of their customers. As
highlighted above, in the absence of an open window in Nepal Rastra
Bank, banks have to hold dollars for relatively longer period of time,
for which there is a substantial cost to the banks. Dollar holding in
current situation is unfavorable from two perspectives. There is an
interest loss to the banks as US dollar interest rate is below 1% as
compared to Nepali Rupee interest rate of 5%. On the other hand, US
dollar as currency is constantly under pressure and is getting weaker
and weaker against all the major currencies including INR. In these
circumstances, banks have no choice but to pass-on the burden of
additional cost of holding excess US dollars to the customers by
maintaining a relatively higher spread. Despite
all the problems that the Nepali forex market has, all its market
players need to be positive and must welcome positive changes in the
market. Sometime ago, officials of International Monetary Fund (IMF)
surveyed our forex market and they have suggested certain reforms which
ask for creating basic infrastructure, in which Nepal Rastra Bank has to
take a lead role by establishing an "Open Window". At the same
time, all the market players, both bankers or non-bankers, need to be
educated on the versatility of the forex market, which if operated
correctly, can have abundant opportunities in store. (Jha is Head of
Finance and Treasury at Laxmi Bank Ltd. The views expressed in the
article are however his personal) Ads of the Month Among
the five ads that we selected for analysis this month, those of the two
beer brands - San Miguel and Iceberg - deserve to be mentioned first.
These campaign ads come after a long period of inactivity for both of
these brands. But
our panel of ad analysts call these (as well as the rest of the five)
ads 'not powerful enough' to make a significant impact in the market.
This is in spite of the fact that they are rated good overall for
clarity of message and use of imagination though there are some easily
noticeable shortcomings in execution. Take
for example the Iceberg ad. What we have taken up is one of the ads that
appeared on the print in October after the company under a new
management relaunched the brand with a changed label. The letter B in
the middle of the brand name is made bigger than the rest of the
letters. Also the shape of the label is changed (and it triggered an
objection from Tuborg as the label for both look similar in appearance
from a distance). Analysing
this ad, the panel members for this column said the creative team has
been very successful in putting through the message of 'freedom with
Iceberg'. "It gives the impression of fun, excitement, premiumness
etc. due to the use of the open jeep", said one analyst. But
another analyst also pointed out that the use of snowy mountain as the
background makes this an imitation of similar ads from other beer
brands. Another flaw pointed out is the superimposed photography.
"It makes the consumer feel treated unfairly though being a
non-technical person he may not be able to tell what clearly makes him
feel like that", pointed out another analyst. The
present ad from San Miguel seems to be targeted to change the old
perception that this brand is meant for slightly aged consumers. Only
the sales report can say whether that objective is achieved from the ad,
but the images of unknown young people used in the photo does not
support the tagline "For young dreamers & achievers."
Perhaps it would have been a good idea to use a known young achiever as
brand ambassador. Introduction
of Yingang motorbikes as the first motorbike manufactured in Nepal is
being advertised on the platform of patriotic feeling. For that purpose,
the ads appearing in the print use the slogan that means "our
country's pride" and has Rajesh Hamal, the matinee idol of Nepali
cinema, as the endorser. "It may catch the attention of the target
group", said one analysts who considers the kids of the businessmen
and armymen as the target group for this product. But the analysts do
not rate this ad as 'powerful enough'. The
use of Hamal as brand ambassador may be a good idea but the female model
the ad uses with Hamal is an unknown personality. "This is not only
a mismatch but may also give some negative impressions about Hamal's
personality itself", said one analyst. Another
point raised by the analysts about the use of Hamal is that as he is
already the brand ambassador in a number of other products he may not be
able to do justice with so many brands under his portfolio. As
the competition is growing in the country's banking industry, the banks
are coming up with new services which are being advertised by applying
ever greater degree of creativity. One latest example is the ad for ATM
facility from Nepal Bangladesh Bank Ltd., and it received good comments
from the ad analysts in our panel. Though the print quality in the
initial runs was not good, the ad got much better in later appearances.
But the appreciation from the panel was not based on the print. It was
the concept that was appreciated. The
ad features a nighttime scene in front of the ATM and there is a car and
a motorbike parked. This very simply drives the message home that the
facility can be enjoyed not only by the car-owners but also by the
motorbike owners. "Had the photo quality been good, the ad would
have been excellent", said one analyst. The last ad we took this month was for the newly introduced instant noodles brand Shaka Laka Boom from Himalayan Snax & Noodles. The ad was noticeable also because it does not match the image generated by the company from the ads for its other existing products such as Mayos. First, the ad is cluttered with too many messages. Second, it does not convey the message that it is a new product. Third, though the offer being advertised is very attractive, there is doubt whether the target group - e.g. the children - would understand the message. |
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