CEO Joseph Silvanus- Standard Chartered Bank Nepal speaks on country's banking sector.
The country's banking sector has grown tremendously over the last two decades, with many commercial banks reporting double-digit profit growth rate year after year. Yet, this does not mean the sector is not facing any problem. Banks have often faced difficulties managing assets and liabilities and rock bottom interest rates have also compounded problems for both financial institutions as well as depositors. Also, there are claims that banks are highly urban centric and people living in rural areas have not been able to make use of modern banking services. Rupak D Sharma of The Himalayan Times caught up with Standard Chartered Bank Nepal CEO Joseph Silvanus to discuss these issues. Excerpts:
Profit of commercial banks went up by over 50 per cent in the second quarter of this fiscal year. But many may not be able to sustain it, as they made most of the earnings through non-core banking activities. What is your take on the issue?
In my view, banks demonstrated better efficiency in the second quarter. Efficiency here also refers to loan monitoring and management, because loss income has come down and balance sheets are looking good. Also, own-account transactions, like recovery of bad loans, have increased. Despite these one-offs, like better loss income and own-account management, banks have grown their balance sheets. But margin compression has come back so strongly it seems banks are running faster to stay at the same place. However, what is good news is that generic business is growing, and margin compression may go away over a period of time. So, businesses that have grown their balance sheets will pay handsome dividends in the days to come.
Doesn't your assessment that 'banks are running faster to stay in the same place' give a negative connotation? Does this mean banks are not being able to generate good profit despite rise in income level?
No, I didn't mean to say that. I am happy with the accretive growth that is taking place. Here, one must understand that every business has bipolar variants. One is the price variant and the other is the volume variant. Over the last few quarters, we've seen a positive volume variant and a negative price variant. While positive volume variant is the result of hike in credit demand, which has increased the pace of asset creation, negative price variant is the upshot of interest rates that have remained at ultra low level for quite some time now. We have seen spike in interbank rates in the last few weeks, but if you check the 91-day treasury bill rate it still hovers around zero per cent. The rates are low because of excess liquidity and I think banks will continue to face problems related to liquidity in the coming days. Now, what banks have to do is manage their balance sheets. They have to see that sources are being built and funds are being used in the right way. Here, one must refer to the basics of banking. This means one cannot use a short-term source, like current account deposit, to fund long-term projects like hydro. Also, one cannot use long-term sources, like five-year term deposit, to fund overdraft loans, which are short-term in nature. If you go against these principles, you end up creating asset-liability mismatch. And this is a sure-shot recipe for disaster. So, all prudent bankers should follow these basic tenets of banking. Coming back to your question, I think growth is taking place and eventually effects of negative price variants will start to wean. That's when banks will start making good money.
You just touched upon issues like negative price variant and asset-liability mismatch. Are you trying to relate these issues to the central bank's directive on interest spread cap of five per cent and channelling at least 20 per cent of the total credit to the productive sector?
Every regulation of Nepal Rastra Bank (NRB) is meant for the well-being of the financial sector. And I don't believe NRB's intention is to create an unfavourable environment for banks. I think NRB wants all banks to compete and grow in an organised manner. So, there is no conflict of interest. But in the process of complying with central bank regulations, the market has become excessively liquid. Therefore, borrowers are enjoying extremely low cost of funds. But I don't think this is just the result of the central bank's directive. Yes, banks are complying with the regulations, but the market forces have determined the price point, which is only heading southwards. And this is not a very encouraging sign for banks.
But deposit rates are also pretty low here, isn't it?
Credit-deposit ratio of commercial banks stands between 68 per cent to 75 per cent, (as against the regulatory norm of 80 per cent). So, there is no reason to pay more. And at a time when the country's sovereign yield curve is below one per cent at any point of the data curve, there shouldn't be any reason for banks to pay higher deposit rates. But this also means there is no incentive for depositors, because consumer prices are increasing faster than deposit rates.
The level of surplus liquidity at commercial banks has gone down significantly in the recent days. Yet, deposit rates are not going up. What could be the reason?
Individual banks that are facing asset-liability mismatch may be trying to attract more deposits by raising deposit rates, but, in aggregate, there is still excess liquidity in the banking sector. Yes, some liquidity has been mopped off the market by initial public offerings launched by some hydro project developers. But these activities are not enough to absorb a big chunk of excess liquidity.
Talks about asset-liability mismatch have been going on for quite some time. How can this problem be addressed?
First, we have to understand that banks are typically debt players, not equity players. So, a normal commercial bank will only look at debt, while specialised institutions should be in place to look at equity funding and long-term financing. Nepal lacks that infrastructure. So, seeds for such infrastructure should be sown now. Banks, at best, can extend short- to medium-term debt and this is what all major banks in the world are expected to do. If you still expect commercial banks to go into long-term financing, then the central bank should introduce provisions that allow financial institutions to float appropriate instruments and options to hedge risk. But such regulatory framework is lacking.
This means innovations are not taking place in the banking sector, isn't it?
I don't think so. Banks here are very cautious, but aggressive in terms of product launch. Last week alone, at least three to four types of savings products and two lending products were introduced. What I am trying to say is banks are profit driven and this characteristic drives them to innovate. But they can innovate as much as the landscape allows them to. If you have restrictive regulations, then banks cannot innovate. Currently, the central bank does not have provisions on many types of forward structures and cross-border structures. Having said this, what should also be taken in account is Nepal's private banking history, which is very short and spans around 27 years. Neighbouring countries have banking experience of over 100 years. So, you must give time to domestic institutions and the regulatory body to mature. However, the country's banking sector must catch up with the changing world, where digital innovations are rapidly taking place. In this regard, cyber laws, and proper regulations on cyber security, digital authorisation and digital signature must be implemented.
Does this mean NRB has failed to come up with effective policies to spur growth in banking sector?
What I'm trying to suggest is in a country where financial inclusion is low and bank branches are unevenly spread, we must start looking at different ways to reach out to customers across the country. That's why proactive legislations are required. One way of reaching out to customers, where brick-and-mortar branches cannot be set up, is through the use of digital platforms. In this context, it would have been great if regulations, like those that support digital authorisation of signatures were introduced and implemented. This would have provided clear direction to financial institutions and allowed them to rapidly promote the use of services like mobile wallets. Now, consider this: country's telephone penetration rate has crossed 90 per cent. If one introduces mobile wallet in rural areas, chances of that service becoming popular are high because people would feel comfortable tapping on the wallet attached to their phone SIM card, rather than using an unseen device. So, with the right enablers, mobile wallet service should be the way to go for Nepal in reaching out to some of the people, as it allows people, like farmers to sell their produce, receive credit and payments, and transfer funds to children studying in urban centres. So, instead of looking inward and laying emphasis on productive and deprived sector lending, the central bank should focus on these issues. This will ensure equitable and sustainable growth. In this regard, NRB and financial institutions should work as a team to address issues related to financial inclusion.
So, NRB has to come up with a set of regulations that enables banks to make effective use of technology to promote financial inclusion?
Yes, there should be legislations to shape a better tomorrow. If you do not, Nepal can never catch up with the rest of the world. If you observe the global trend, it is not about opening brick-and-mortar branches. It is about creating the right customer experience. So, we should replicate international best practices. By replication, I do not intend to say copying what others are doing. We must customise foreign products and services to serve the interest of the country and individual user