Gyanendra Dhungana, a seasoned banker with three decades of experience in the banking sector, is the Chief Executive Officer of Nabil Bank. He has a wealth of experience leading the bank as CEO and serving at Nepal Rastra Bank. HRM Nepal caught up with Dhungana to discuss the current perspectives of the banking sector. Excerpts:
Q. Are you optimistic about the Q1 results of the banks in this fiscal year?
A. The first-quarter results are quite satisfactory, except for the NPA (non-performing assets) level. Most banks are grappling with rising NPAs, reflecting the economic slowdown. The surge in profitability is primarily due to the provisions of the Monetary Policy 2024/25. However, it’s too early to predict the scenario for the entire fiscal year. The overall performance of the banks depends on how quickly the economy recovers.
Q. Do you think the NPA level is alarming?
A. Currently, the industry average NPA is 4%. Considering the long history of banking in Nepal, with private banks operating for the past four decades, this level isn’t alarming. However, it has increased exponentially in a short period, jumping from around 1% just two years ago. The recent surge in NPLs highlights challenges in recovery and the economic slowdown. The Covid-19 pandemic, coupled with rising global commodity prices and the Russia-Ukraine conflict, had significant economic impacts. Additionally, Nepal’s precautionary measures, including import bans, due to Sri Lanka’s foreign currency depletion, further hindered the economy. While foreign currency reserves increased and remittances surged, the government’s slow pace of development spending failed to generate economic demand. Inadequate budget allocation and inefficient spending, along with delays in settling contractor dues, have slowed construction activities and reduced demand for construction materials. This has affected consumption patterns, increased youth migration, and reduced luxury item consumption. Moreover, cooperative scams have further dampened investor sentiment in real estate and other luxuries. The banking sector is also impacted by problems in cooperatives and microfinance institutions (MFIs).
Q. The NRB has relaxed loan classification criteria. Do you see any impacts of this?
A. It has helped reduce NPAs by 0.5%. Previously, even after recovering a bad loan, it remained classified for six months. This not only affected loan loss provisioning but also hindered the reclassification of borrowers as non-defaulters. Nepal Bankers’ Association (NBA) sought a remedy from the NRB, which now allows the classification of defaulted borrowers as ‘under watchlist’ if they resume debt servicing.
Q. Are bankers facing difficulties in planning due to false government projections regarding development expenses, growth, and revenue mobilisation?
A. Definitely. Annual plans are framed based on the government’s fiscal budget and Nepal Rastra Bank’s Monetary Policy. While plans were developed based on 6% GDP growth and 12.5% credit growth projections, there are concerns about their realism. The government’s efforts to stimulate the economy, such as settling contractor dues and addressing cooperative issues, are positive. If construction activities pick up in the second quarter, it could have a multiplier effect on the economy. This is an opportune time to avail credit due to low-interest rates. Addressing challenges in the real estate and housing sectors by the government and Nepal Rastra Bank (NRB) could further boost consumption of construction materials, create jobs, and propel the economy.
Q. Amidst rising NPAs, the 10 largest commercial banks are going to be audited by international firms. What is your take on this?
A. This isn’t primarily due to rising NPLs. It’s a condition imposed by the International Monetary Fund for obtaining credit. The NRB has issued a notice but has temporarily postponed the process. However, it’s expected to happen sooner or later. Nepali banks adhere to international audit standards and NRB inspections. Audits by international firms will likely benefit the sector as it aligns with international practices and ensures compliance. Nepal’s stricter classification standards, compared to countries like India, further demonstrate the manageability of the current NPA level.
Q. Does Nabil have the first mover advantage in the market or does it have to compete in the market by hook or crook with new players?
A. Nabil is the first private sector bank. We were focused on corporate banking in the initial days, which is why NPA was insignificant. However, lending in the directed sectors such as agriculture, MSMEs, energy and deprived sector caused increase in NPA. In the meantime, we’ve acquired two financial institutions – United Finance and Nepal Bangladesh Bank. Both of these institutions were having different type of portfolios. United Finance consists of more hire purchase loans and most of them were defaulted. Further, Nepal Bangladesh Bank had a significant exposure in the construction sector. Construction sector has been hit hard as the government has been deferring settlement of outstanding dues of the contractors. Despite these challenges, we’ve been enjoying a first mover advantage in digital banking and computerised banking. Nabil Bank is the pioneer in lunching new banking products.
Q. Nabil Bank has been consistently maintaining its growth, ranking etc; though there have been fluctuations witnessed among other players?
A. Nabil Bank has consistently maintained its growth and ranking, despite fluctuations among other players. As the first private bank, Nabil has pioneered in developing systems and setting up procedures, with everything guided by these systems. However, we too are feeling the adverse impact of the current economic slowdown, facing a lack of credit demand. Analysing credit growth across banks today, we see that credit is often swapped from one bank to another, as borrowers seek the benefits of lower interest rates.
Q. It’s said that corporate clients are overburdened with debt and have no appetite for fresh loans. What’s your view on this?
A. I think they have no additional requirements unless they’re expanding. Meanwhile, the Nepal Rastra Bank’s Working Capital Guideline calls for a gradual reduction in working capital loans previously availed, while the current investment climate may deter new projects as confidence declines. Due to the economic slowdown, default rates are rising, especially among Micro, Small, and Medium Enterprises (MSMEs). Credit demand hasn’t shown much improvement in the first quarter; import loans, for example, typically surge as traders open L/Cs (Letters of Credit) for festival-related imports, but this has been subdued. This indicates the economy is grappling with crisis. The government has acknowledged this and is taking steps to address it. Interest rates are at their lowest, with banks lending at 7-8%. If the government can settle outstanding dues with contractors and expedite development works, I believe economic activities will pick up.
Q. In this scenario, are banks taking forceful recovery measures?
A. There are many challenges; sales are down, and people aren’t generating income. Forceful recovery measures are difficult, as auctioning borrower assets poses challenges in a market with few buyers, many of whom are waiting for further price drops. Practical issues arise with forced recovery, as seizing homes and land is difficult when borrowers are pleading for time. This is why we’ve been advocating for an asset reconstruction/management company. The Monetary Policy of FY 2024/25 has announced plans to draft legislation for such a company, which would securitise assets and provide bonds to banks, creating new resources for fresh portfolio investment.
Q. You mentioned that the NPA has increased following the Nepal Rastra Bank’s directed lending policy, as not all banks have expertise in the central bank’s priority sectors. With the central bank offering alternatives like investing in bonds from banks specialising in these sectors, how feasible is this for others to meet portfolio requirements?
A. It’s largely rational, and we’ve advocated for this for some time. It’s natural for the nation to prioritise investments that drive growth and stability. However, not all banks have expertise in these target sectors. Nabil Bank, for instance, has preferred wholesale lending to microfinance institutions (MFIs) over direct investment in deprived sectors, which proved challenging and led to higher NPAs. We’re happy to buy bonds from banks specialising in agriculture, energy, and MSMEs, though bond issuance remains insufficient. For instance, Agricultural Development Bank and NMB Bank issued agricultural and energy bonds, respectively, but these were inadequate. We believe the government should issue bonds and invest through government banks. India’s NABARD (National Bank for Agriculture and Rural Development) allows banks without agricultural investments to purchase bonds, a model Nepal Rastra Bank could emulate instead of imposing penalties.
Q. Banks still have a limited client base, with approximately 1.9 million loan clients. Why is easy access to finance still an elusive goal?
A. Beyond banks, people also access credit from MFIs and cooperatives. From the banking sector’s perspective, we need to expand loans to SMEs and micro/cottage industries. Procedural and documentation issues may be deterring borrowers, who then turn to cooperatives, MFIs, or even loan sharks. Although loan clients are fewer than deposit accounts – which are nearly double our population due to account duplication – I agree that banks should work to increase access to finance.
Q. What’s Nabil Bank’s plan for portfolio expansion?
A. As Nepal’s first private commercial bank, Nabil has expanded its branch network through the acquisition of two financial institutions and currently operates 268 branches nationwide. Moving forward, we’ll focus on digital banking, offering more products online and through mobile banking to streamline processes and reduce costs. Given market growth, we’ve set an annual growth target of 10%.
Q. There are complaints from the public about high transaction costs in mobile banking. What’s your stance?
A. Digitising services to pass on costs through digital platforms has been challenging due to the Nepal Rastra Bank’s customer protection regulations. We’ve made significant investments in IT and digital security, which banks must absorb. Nonetheless, we’re convinced that digitalisation will reduce costs over time, ultimately benefiting consumers.
Q. The banking sector has seen exponential growth over the last decade. Do you foresee similar growth in the next 10 years?
A. The next decade will be tough. Similar growth may be unachievable. Over the past decade, economic growth was consistent, bank equity increased fourfold, and we adopted aggressive lending. Large-scale projects in sectors like cement, steel, and hydropower contributed to credit growth reaching 30%. However, credit expansion now depends on finding new sectors for investment.
Q. Do you believe the 12.5% credit growth target outlined in the Monetary Policy 2024/25 will be met?
A. Based on the first quarter, I can’t say. Rs. 111 billion in credit was expanded in Q1, falling short of the target. I can provide a clearer projection after Q2. Credit growth depends on the investment climate and banks’ capacity to explore new opportunities. We’re exploring financing in electricity transmission, startups, ICT, and other sectors. However, government policies must be conducive, as lending remains collateral-based. Transitioning to project-based lending without collateral exposes banks to legal risks if projects fail. The entire ecosystem must support growth in emerging sectors, such as startups. Opening up electricity transmission to private sector investment, following the success of private investment in generation, could provide new financing avenues.
Q. There’s been ongoing debate about whether FDI (foreign direct investment) projects should source financing from Nepali banks. What’s your view?
A. We don’t agree that FDI projects should exclusively source financing from foreign banks. Foreign investors come with equity, and these projects are treated as Nepali, providing new financing opportunities. We’re financing FDI projects like Hongshi Shivam Cement, although we don’t accept personal guarantees from foreigners. Instead, we secure collateral from local partners, including project assets, land, and buildings.
Q. Nepali banks aren’t providing counter-guarantees for foreign banks. What do you have to say regarding this?
A. We do provide counter-guarantees for foreign banks, though there’s hesitation with Chinese banks due to past challenges and court cases in realising guarantees.
Q. What’s next for you after serving your second term as CEO of Nabil Bank?
A. I’ve completed my first term and started my second. With three decades in banking, I’m not considering another bank. I’ll continue contributing to the sector with my knowledge and experience.
Q. Private equity and venture capital (PEVC) are emerging as growth facilitators for businesses in Nepal. Any plans to establish PEVC?
I don’t have plans for PEVC, though I appreciate its role in facilitating business. Traditionally, businesses relied on bank loans, but new equity sources now provide a foundation for innovation. The government should also enable the private sector to issue bonds or commercial papers, which would narrow the debt-to-GDP ratio. There’s significant opportunity for private equity in Nepal.
