Ashok Sherchan is the Chief Executive Officer of Prabhu Bank Ltd. Engaged in the Nepali banking industry since 1995, he has been instrumental in advancing the Prabhu Group’s remarkable journey in the financial sector. Starting from a finance company, Prabhu Finance, it initially merged with a commercial bank, erstwhile KIST Bank, and operated as Prabhu Bank. The bank further strengthened and expanded by merging with two other commercial banks, namely Grand Bank and Century Commercial Bank. Over the last 10 years, Prabhu Bank has made significant strides. The HRM Nepal caught up with the CEO of Prabhu Bank, Ashok Sherchan, to learn how the bank is moving forward in the coming years and what they aim to achieve in the next decade. Excerpts:
Q. How would you analyse the current scenario of the banking sector, specifically the performance of the first quarter of FY 2024/25?
A. The performance of the first quarter is quite good. We are stable now and making efforts to achieve better results. However, we still don’t see a rosy picture of the economy. Businesses are struggling to survive rather than grow. Given the scenario, banks have to focus on stability and it would be a significant achievement if we can maintain a positive outlook.
Q. Recently, in a public forum, you mentioned that the current economic situation is like a glass half-full. Have you seen any signs of improvement in the economy while making this statement?
A. Market sentiment is improving; we’re receiving loan demands better than the previous year. The major concern at this time is the need for the government’s push across sectors, except the capital market, such as manufacturing, agriculture and real estate, among others. As the new government has promised stability and improvement in the economic situation, the government must make tangible interventions to address the issue within six months, or cumulative frustration might reappear. The government should expedite development works by settling outstanding dues. Slackness in the construction, automobile, real estate, education and health sectors has caused a slowdown in the economy. Schools and colleges are grappling with a crisis-like situation as the number of students has dropped significantly. Meanwhile, many hospitals have been opened by the private sector; however, footfalls in the hospitals are lower than expected, which means people are deferring their regular checkups and surgeries.
It is true that the government can’t intervene across all sectors simultaneously, however, the government must begin with sectors having multiplier benefits/impacts. If the sectors with multiplier impacts bounce back gradually, this will help develop confidence in other sectors too. Thus, investment will come, and expenditure and consumption will rise.
Q. The Monetary Policy for fiscal 2024/25 has facilitated the construction sector. Do you think the construction sector will gather pace?
A. This will help revive the construction sector to some extent. However, these facilities are for a certain period. Rather than expecting much from the Monetary Policy interventions, the issues of the construction sector are grave and need to be addressed from the fiscal side. If the outstanding dues are cleared by the government by mid-December, the construction sector will definitely gather pace.
Q. You mentioned that the demand for loans is on the rise. In which areas are you witnessing this demand?
A. There is demand for loans in multiple sectors, including energy and services. However, there is no demand from the manufacturing sector, as they are operating at half capacity and some have closed. The growth of the manufacturing sector is fundamental for boosting production and creating jobs. Assuming that the government will expedite infrastructure development, investors will chip in with investments in industries and expand capacity. The slowdown in government infrastructure development activities has adversely affected these industries, mainly cement, steel and iron rods, among others. As the economy grapples with the crisis, a strong and stable government must work in an unprecedented manner to accelerate economic activities.
Q. It is said that the major loan clients (borrowers) of banks are over-financed/overleveraged, resulting in banks being unable to push loans. What is your take on this?
There is a narrative that corporate borrowers are over-financed. This is mainly due to the impact of the central bank’s working capital guidelines. The loans obtained by the borrowers were utilised in multiple sectors, which was not justified and compelled them to pay back the loans. Not only the major corporate borrowers, but there is also a lack of appetite among businesses across all sectors, leading to stagnation in economic activities. Loan mobilisation in real estate and the share market has plunged due to stringent provisions. I think borrowers will be able to bring down loans to a level that will be justified within a year, and then the credit demand is expected to surge gradually.
Q. Banks are currently flush with liquidity and interest rates have been lowered. The banks’ capacity to lend has improved, especially with the recent suspension of the capital conservation buffer by Nepal Rastra Bank. In such a scenario, experts worry about reckless lending, which could lead to high non-performing loans. What do you have to say?
A. It is true that banks have excess liquidity and lower interest rates. There are no solvency issues for the banks to lend, however, there is no demand from the private sector. One of the fundamental reasons behind this is the lack of confidence among the business community and the public.
Q. If we ask Nepal Rastra Bank, they often say that banks are not exploring new opportunities and are confined to a limited number of corporate borrowers. A high potential for SME financing is missing. What would you like to say about this?
A. It is not true that banks and financial institutions are not exploring potential borrowers. The IT sector, which was not initially envisioned to grow substantially, has been primarily explored by the banking sector. Banks’ contributions to propelling the economy through access to finance are immense and unparalleled. Banks have footprints in every local area. Any projects or ventures in all corners of the country are connected with banks or have obtained access to finance. One important aspect to underline regarding financing is that it depends on the creditworthiness of the borrowers and the viability of the projects or schemes.
Q. The asset quality of banks has been questioned following the surge of Non-Performing Loans by two-fold in the last year. What would you like to say on this?
A. The slowdown in the economy is the major reason behind the rise in Non-Performing Loans. The economy couldn’t grow as per the government’s forecast. The private sector makes investments based on these forecasts. Due to the huge mismatch in the government’s projections, the private sector suffered significant losses. The NPL is at a manageable level as our lending is collateral-based or backed by land and property. However, if the economy does not bounce back, the private sector may no longer be able to service its debt. We should prevent that worrisome situation.
Q. Does this mean project financing is still a far-fetched dream in Nepal?
A. If we issue project loans to some borrowers, the government and Nepal Rastra Bank view it differently. We have to allocate 20% provisioning while issuing project loans. That doesn’t mean project-based lending isn’t happening; large factories, cable cars and star hotels are all project loans. In manufacturing units, we issue loans based on the collateral of mills, machinery and stocks. Project loans are already practiced in Nepal. Simultaneously, we are advocating for policy support for project financing.
Q. Considering the substantial loans mobilised for hydropower projects relative to their returns, there is an assumption of loan misuse through inflated project costs. What is your take on this?
A. In large projects, banks and financial institutions primarily rely on civil, mechanical and hydrological consultants due to their lack of expertise in these areas. Over time, developers have also gained experience and are working more cautiously. However, hydropower projects are capital-intensive and have long gestation periods. They often operate in remote locations and face various challenges such as social issues, climate-induced disasters and unforeseen costs. Developers must engage with local communities in multiple ways and implement various adaptation and mitigation measures, as well as local infrastructure.
Q. Mainly in the tradable sector, the high cost of funds is criticised for reducing export competitiveness. Do you agree with a fixed interest rate for export-based production units?
A. Regarding export competitiveness, the cost of funds is not a significant factor as far as I understand. There are multiple issues such as high transportation and logistics costs, policy instability, scale of production, backward and forward linkages, and lack of promotion and market access, among others. We need to address these issues in an integrated way, rather than a piecemeal approach. We sorely lack capacity, expertise, raw materials, and strong market linkages and value chain integration. For instance, we have not been able to commercialise agriculture and are still relying on subsistence-level farming. When talking about exports, buyers seek high quantities with prescribed quality, which makes it difficult for us to meet the volume and ensure quality control. I do see a light at the end of the tunnel through the IT sector, which could emerge as an area of competitive advantage for Nepal.
Q. Monetary Policy 2024/25 has provided a range of relaxations in credit classification and suspended the capital conservation buffer for banks and financial institutions. Will this be instrumental in increasing the profits of banks?
A. Banks and borrowers have been given relaxations through Monetary Policy 2024/25, primarily to spur the economy and boost private sector confidence. The provisions of the Monetary Policy are mainly focused on maintaining the stability of the financial sector and propelling the economy with sound growth in private sector credit. It has offered some relaxation to borrowers, thereby lowering the cost of intermediation. These provisions are not intended to benefit banks and financial institutions in any way.
Q. The Ministry of Finance has placed a significant responsibility on Monetary Policy, rather than addressing issues through fiscal policy. Why is this happening?
A. Economic issues should be addressed through fiscal policy. While Monetary Policy has its limitations, expectations for it have been rising in recent years. There must be harmonisation between fiscal and monetary policy.
Q. Are you satisfied with the overall performance of Prabhu Bank in the last fiscal year?
A. Given the overall economic situation of the country, we are satisfied with the performance we have achieved. However, some legacy assets acquired during the merger have posed challenges. We have been addressing these issues over time. I haven’t observed any bad intentions among the borrowers we have had issues with. If they had bad intentions, they would have fled, but they are trying to overcome their difficulties and bounce back.
Q. Prabhu Bank has taken a significant leap. What sort of scenario do you foresee in the next 10 years for the banking industry in general and Prabhu Bank in particular?
A. Banks and financial institutions (BFIs) have established their shape and position. Moving forward, the economy will certainly grow and I assume that the business volume of the bank will expand. The coming days are brighter for the country’s economy and, obviously, for the financial sector.
