‘Banks are not at fault for the increased interest rates’

With the Nepali economy going through turbulent times, banks are grappling with multiple challenges at present. For over the past year, the shortage of investment-grade liquidity, which has seemingly eased for now, has been the biggest difficulty leading to hikes in borrowing rates and ultimately a sharp slowdown in most kinds of economic activities across the country. 

The Nepal Bank Limited, the oldest bank in Nepal, has braved these challenges as indicated by the latest financial report of the bank. According to the bank’s CEO Krishna Bahadur Adhikari, the bank has its current focus on increasing deposits and keeping the non-performing loans (NPLs) under the statutory limit. In a conversation with the HRM, he talked about the difficulties for banks, Nepal Bank Limited’s strategy to face the economic uncertainties, competition in the banking sector and the prospect of mergers between government-owned banks, among other topics. Excerpts: 

The Nepali banking sector is probably facing one of the most difficult times in living memory as external and internal headwinds have affected economic activities in the country badly over the past one year. How has Nepal Bank Limited faced this situation?
The fiscal year 2021/22 was undoubtedly one of the most difficult times for the Nepali banking system due to the acute shortage of loanable funds. As a result, banks and other financial institutions postponed lending activities. Nepal Bank Limited was no exception in this regard. We tackled this situation by minimizing unproductive lending, encouraging attractive and diverse deposit products, and maintaining good relations with corporate depositors. We would like to thank our customers for their unwavering support.

What difficulties has the bank encountered in the wake of the liquidity crunch and contraction in economic activities? How the situation has affected the profitability of Nepal Bank Limited?
Due to the liquidity crunch and economic slowdown, the lending process has slowed down and the amounts of quality assets have declined. This has slightly decreased the bank’s profits. We had to be creative and launched various deposit products to collect funds. We also boosted our marketing activities.

The decline in profit, and particularly the rise in non-performing loans (NPLs), has raised serious concerns about the financial health of banks lately. How capable do you think commercial banks are to face macroeconomic headwinds?
The banking sector is in a less risky position compared to the other sectors of the economy. This is due to the adequate provision for NPL. The capital base of the Nepali banking system has quadrupled due to the proactiveness of the central bank. Arrangements related to the Capital Conservation Buffer and capital based on the Common Equity Tier (CET) 1 will help the banks to face macroeconomic headwinds.

How is Nepal Bank Limited working to keep the NPLs under the statutory limit?
Our NPL position is within the statutory limit, and we aim to keep it within 2 percent. We do so by maintaining the financial health of our clients. For chronic loans, we are implementing the loan recovery process to reduce the NPLs.

How do you see the prospects of improvements in these two key areas of banking business in the coming days?
Remittance inflow has been increasing and the country’s net foreign assets are in a good position. Deposits have been increasing too, and the deposits of ‘shadow banking’ are gradually being transferred to the formal banking system. This is a good signal for the banking industry. As liquidity improves, the lending capacity of the banks should improve. This will boost economic activities, thereby strengthening the financial situations of the customers and decreasing loan defaults and NPLs.

What are the major challenges for banks at present?
There are challenges related to cyber security, the need for investment in banking technologies, diversification of business, competition, retention of talents, maintaining the par share of markets and side-effects of mergers. However, we will consider these challenges as an opportunity to be creative and innovative to improve the banking system.

The rift between the banks and the country’s business community seems to have grown wider lately with businesspersons accusing banks are only focusing on their profit. Why are banks not supporting businesspersons at a time when economic slowdown has affected almost every type of business activity?
Banks and financial institutions are earning normal profits with respect to their investments. Minimum earnings per share, spread rate within the range of regulatory directive, less rate of return on equity and low level of return on assets indicate normal profits of the banking industry. Due to expensive source funds, bank rates and credit rates have gone up. Banks’ earnings have been lower than the given spread rate. These scenarios suggest that banks are not at fault for the increased interest rates.

How do you view the ongoing consolidation in the banking sector?
Consolidation is the demand of the situation and is one of the important tools to enhance the capital base, achieve operational efficiency and strengthen the resilience of banking and financial service institutions.

Banks with private investments are on their way to becoming bigger and stronger with mergers and acquisitions. How is a bank with a majority of shares owned by the government like Nepal Bank Limited preparing to compete with those banks?
Mergers and acquisitions have been introduced as a national policy to strengthen banks and financial institutions. This policy has helped banks to enhance their businesses. Nepal Bank has been following organic methods to increase its size. Nepal Bank’s business growth rate was second to the highest last year. This implies that we can provide the right products to the right clients with better customer service. This will help us increase our balance sheet and compete with other banks.

The Nepal Rastra Bank governor recently hinted that the central bank is in favor of a merger between the government-owned banks. Do you see the possibility of such a merger in the foreseeable future? 
The Global Financial Crisis of 2008-09 has taught us the importance of maintaining a certain size of a financial institution. Mergers allow us to maintain and achieve the “size matters” concept. So, it could be good to have mergers between government-owned banks.

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