Banks unenthusiastic about productive sector loans Page III Despite the policy-provision of Nepal Rastra Bank (NRB) requiring commercial banks to disburse 20 percent of their total credit to productive sectors, lending had reached only 16.52 percent as of mid-August.

Ins Ide

M&A: And they lived happily ever afterNepal’s banking industry does not have long a history of mergers and acquisi-tions, but the trend intensified after Nepal Rastra Bank (NRB) introduced merger bylaws in 2011 and acquisition bylaws in 2014. As of mid-August 2016, a total of 119 banks and financial institu-tions (BFIs) including D class organiza-tions had participated in mergers and acquisitions. Among them, 78 BFIs lost their licences leaving 41 BFIs in the fray, according to the central bank. Nepal Rastra Bank (NRB) and bankers have described it as a massive success in a short span of time. Pg: II

Home and auto loans surgeOwning fixed property and auto-mobiles has always been a desire for most people, and this aspira-tion is now within reach as most banks have been providing easy loans to fulfill this wish. As a result, lending in this segment, which had entered a gloomy phase a few years ago, has started wit-nessing an upward trend. NRB figures show that the realty business has started picking up since 2014-15 with a surge in property lending. Pg: IV

The industry will not advance without skilled human capitalThe history of modern banking in Nepal actually started in the mid-1980s with the inception of Nabil Bank as the very first joint venture bank. Within the next two years, two more joint venture banks, Indosuez Bank and Grindlays Bank, came into the picture. These multina-tional banks changed the banking land-scape for both entrepreneurs and those aspiring to make a career in banking. They were proactive in tapping locally available top talents and converting them into a skilled workforce of global standards. Pg: III

WEDNESDAY, SEPTEMBER 28, 2016 (12-06-2073) kathmandupost.ekantipur.com

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banking special

Banking boom:

POST REPORTKATHMANDU, SEPT 27

These days, customers, who want to transfer money from one bank account to the account of another bank, do not have to go through a cum-bersome process as in the past. They can simply walk into the bank where they have an account, fill up a form and ask the teller to make the transfer. Within a few hours, the money will be deposited in the desired account.

If things go according to the plan, people can very soon sit in front of their computers or tap on their smartphones and make high-volume trans-fers. Very soon, large-value cheques of over Rs100 million may also be cleared and set-tled within a few seconds—as against a few hours at pres-ent—as the Nepal Rastra Bank (NRB) has initiated the process of installing a system called “Real Time Gross Settlement”.

Much of these services were available quite some time ago in most of the devel-oped and developing coun-tries. In that sense, Nepali banking sector is still a lag-gard. But the direction in which the sector is heading, especially in terms of adopt-ing new technology, it is cer-tainly encouraging.

The history of Nepal’s banking sector dates back to November 1937, when Nepal Bank Limited, the first Nepali bank, was established.

However, the sector did not witness growth for a long time.

Then in mid-1980s, the gov-ernment launched the first phase of financial sector reform programme and par-tially liberalised the sector. This policy shift led to the establishment of Nepal Arab Bank Limited (currently known as Nabil Bank) in 1984. This was the country’s first joint-venture commercial bank established with a 50 percent foreign equity.

Subsequently, Nepal Indosuez Bank (now known as Nepal Investment Bank) start-ed operation in 1985. This was followed by the opening of Nepal Grindlays Bank (now known as Standard Chartered Bank Nepal) in 1987.

The Nepali banking sector then made a big leap forward following the restoration of democracy in 1990. The subse-quent democratic govern-ments soon adopted open and liberal economic policies and focused on liberalisation of the financial sector. As a result, the country’s banking sector witnessed a rapid growth.

Today, the country has 28 commercial banks, 67 develop-ment banks, 41 finance com-panies and 42 microfinance development banks. These institutions have 4,274 branch-es, with population per branch standing at 6,562, as against 7,206 a year ago.

Despite the proliferation of banks and financial institu-

tions (BFIs), most of them have limited their presence to urban areas. Today, 45 percent of the BFI branches are locat-ed in the central region of the country where the capital, Kathmandu, is located. In con-trast, only 5 percent of the branches are operating in the Far-western Region.

“It wouldn’t be appropriate to say the presence of banking institutions is low in the Far West considering the popula-tion of that region,” Sanima Bank CEO Bhuvan Kumar Dahal told the Post.

The Far-western Region houses only 10 percent of the country’s population. Despite this, branches operating in other regions cater to a lot more people than in the Far West.

“But the Far West is also a region with a very difficult terrain. There, population is scattered and a big chunk of people from that region migrate to India to work. So, it would be appropriate to mobi-lise microfinance institutions in that area,” Dahal said.

Despite reluctance of banks and financial institutions to operate in the region, com-mercial banks expanded their presence in the region at the fastest pace in the last fiscal year.

The number of commercial bank branches in the region went up by 19.4 percent to 111 in last fiscal that ended in mid-July. The pace at which the number of branches grew in the Far West last year is the

second highest after the Western Region, where the number of branches increased by 19.9 percent.

“To cater services to the masses of rural areas, like the Far West, we must embrace technology,” said Anil Shah, CEO of Mega Bank, which has successfully rolled out branchless banking units to various rural areas to provide formal banking services to the rural population.

But there is a caveat. “While technology is going to be the next big thing in delivering banking services in rural areas, we should also find out the real need of the rural pop-ulation and tailor products accordingly so that those peo-ple don’t have to face any diffi-culty while using them,” said Shah. “So, simply emulating practices that have been suc-cessful in other countries will not help rural population of Nepal.”

In Nepal, technology-based services like branchless bank-ing are being provided to meet the payment and credit needs of people who do not have access to formal financial sys-tem. Today, there are 812 branchless banking centres in Nepal, which are providing services to over 213,000 people. All of these centres are being operated by commercial banks.

Lately, mobile phone-based payment system has also gained traction. Today, there are 1.6 million mobile banking customers in Nepal. Also, there are 4.1 million debit card users.

These initiatives are not only automating the banking system, but raising people’s access to finance.

To ensure access of finance to all, the central bank, in coordination with the govern-ment, has introduced a num-ber of policy models in the past. These include Grameen bank model, wholesale micro-finance model, directed lend-ing model, project-based micro credit model, financial

Branches of Banks and financial institutions

Eastern Central Western Mid-western Far-western

Region Class ‘a’ Class ‘B’ Class ‘C’Eastern 347 104 25Central 888 324 105Western 350 311 35Mid-western 173 83 9Far-western 111 30 1

non-governmental organisa-tions (FINGOs) model and the cooperative model.

Simultaneously, NRB has also taken an array of policy initiatives to ensure reliable and affordable financial ser-vices to the poor, including liberal licensing policy for microfinance institutions, requirements for banks and financial institutions to allo-cate certain portion of their credit for investment in the productive sector, special refi-nance facility for cottage and small industries, directives on consumer protection, and directives on branchless bank-

ing and mobile banking ser-vices, among others.

NRB has taken all these steps to push forward the financial inclusion drive and bring the excluded population currently in the informal, undocumented, unmonitored and unregulated system into the formal, transparent, and protected financial system.

One of the biggest challeng-es faced by the banking sector today is to bring the popula-tion that are financially excluded and those using the informal channels to the for-mal banking channel.

A latest report jointly pre-pared by NRB, the United Nations Capital Development Fund (UNCDF) and the United Nations Development Programme says 61 percent of

Nepali adults have access to formal financial services, while 21 percent use informal channels and 18 percent do not have any access to finance.

But even among those with access to formal financial ser-vices, only 7 percent use all four types of financial prod-ucts—savings, payment, cred-it or insurance—while 25 per-cent use only one type of for-mal financial product, the report says.

“This suggests lack of availability of good-quality and relevant financial prod-ucts,” adds the report, stress-ing on the need for coming up with “low-cost, flexible and diverse financial products that are better tailored to the unique needs of the popula-tion so that individuals can

manage their finances, increase income, manage risks and build wealth over time”.

“In this regard, more bank-ing and digital financial ser-vices should be expanded rap-idly for which financial insti-tutions should redesign their business strategies to incor-porate specific plans for pro-moting access of their servic-es to low-income groups,” says working paper titled ‘Promoting Financial Inclusion in Nepal: Policy Assessment and Priorities’ prepared by NRB Director Bhubanesh Pant, adding, “Serving the low-income groups should be treated both as a business opportunity as well as a corporate social responsibility.”

FInAncIAl InclusIon key To susTAInAble growTH

class ‘a’ class ‘B’ class ‘c’ totalTotal Deposit/GDP (%) 78.47 12.39 2.86 93.72Total Credit/GDP (%) 61.93 10.36 2.51 74.79Total Credit/ Total Deposit (%) 78.91 83.62 87.72 79.8Non-performing Loan/ Total Loan (%) 1.82 1.48 14.42 2.19Deprived Sector Loan/Total Loan (%) 5.52 6.77 4.57 5.65Capital Adequacy Ratio (%) 12.12 15.31 22.22 12.91No. of Branches 1869 852 175 2896No. of Deposit Accounts 13,010,175 3,302,162 523,680 16,836,017No.of Loan Accounts 753,636 303,934 39,000 1,096,570No. of Branchless Banking Centers 812 — — 812No. of Branchless Banking Customers 213,084 — — 213,084No. of Mobile Banking Customers 1,604,578 133,561 16,427 1,754,566No. of ATMs 1,661 230 17 1,908No. of Debit Cards 4,142,390 479,318 35,417 4,657,125No. of Credit Cards 52,014 — — 52,014No. of Prepaid Cards 82,797 — — 82,797

Source: NRB

Banking Sector at a glance

Today, 45 percent of the BFI branches are located in the central region where the capital, Kathmandu, is located

money IIWednesday, September 28, 2016 | the kathmandu post

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banking special

M&A: And they lived happily ever afterPRITHVI MAN SHRESTHA

Nepal’s banking industry does not have long a history of mergers and acquisitions, but the trend intensified after Nepal Rastra Bank (NRB) introduced merger bylaws in 2011 and acquisition bylaws in 2014.

As of mid-August 2016, a total of 119 banks and finan-cial institutions (BFIs) includ-ing D class organizations had participated in mergers and acquisitions. Among them, 78 BFIs lost their licences leav-ing 41 BFIs in the fray, accord-ing to the central bank. Nepal

Rastra Bank (NRB) and bank-ers have described it as a mas-sive success in a short span of time.

“After observing the ten-dency of Nepalis to split, I had not imagined that so many BFIs would merge successful-ly,” said Upendra Poudel, pres-ident of the Nepal Bankers’ Association. “Bank promoters have shown great profession-alism as opposed to self-inter-est in most cases which con-tributed to the success of the mergers.”

A central bank official also termed the mergers that have taken place so far a success,

but added that the number of commercial banks had not come down as per the central bank’s expectations.

The central bank had hoped that the number of commer-cial banks would shrink to 10-15 banks with a capacity to invest singlehandedly in big infrastructure projects after their paid-up capital require-ment was ramped up fourfold last year.

Unable to properly regulate and supervise a large number of BFIs amid rising incidents of financial misappropria-tion, the central bank had introduced the merger bylaws

in 2011 to lead the banking system to consolidation. The acquisition bylaws introduced in 2014 helped this drive fur-ther as it eased the consolida-tion process compared to mergers.

NRB initially encouraged BFIs to go for mergers by offering various incentives while also forcing a number of BFIs with the same promot-ers to join together. For exam-ple, the central bank forced the BFIs promoted by the tainted NB Group to merge and it also compelled NIC Bank and the Bank of Asia to amalgamate.

While initial moves for merger and acquisition were taken to reduce the number of BFIs to enable NRB to regu-late and supervise them effec-tively, last year the central bank instructed BFIs to increase their paid-up capital fourfold in two years to rush the consolidation drive.

With the deadline for meet-ing the paid-up capital requirement approaching, there has been a surge in mergers and acquisitions late-ly. According to NRB, six BFIs have already received letters of intent to merge while another nine are on track to get their letters of intent.

Merger experiencesA study conducted by the

central bank last year entitled ‘Status of BFIs after Merger and Effectiveness of Merger’ revealed an overall positive output among BFIs after amalgamation. According to the study, the financial indica-tors of most merged entities improved in the third year after showing mixed results in the first two years. Non-performing loans (NPL) rose in the first two years but decreased in the third year.

The ratios of net profit against net asset, net profit against equity and loan against dividend dropped in the first two years, but increased in the third year in most BFIs.

During the survey, most employees said they were encouraged by the merger. Likewise, opportunities for promotion remained unchanged for most respond-ents. The central bank con-ducted the study among 25 entities created after the merger of 68 BFIs till mid-Jan-uary 2015.

Bankers overseeing merg-ers largely have a positive note to share about the amal-

gamation. NMB Bank, which was merged with four finan-cial institutions, has good experiences regarding its financial results.

NMB Bank merged with Bhrikuti Development Bank, Pathibhara Development Bank, Clean Energy Development Bank and Prudential Finance in October last year. Poudel, who is the CEO of NMB Bank, said that the bank’s increased profita-bility in the last fiscal year speaks volumes about the suc-cess and synergy effect of the merger.

“The combined net profit of the four BFIs before the merg-er was Rs760 million, and it jumped to Rs1.15 billion in the last fiscal year,” said Poudel. He added that they had not faced any significant prob-lems since the merger as the employees coming from the other financial institutions have been treated equally.

NIC Asia Bank, which was the first bank to go for a merg-er between two commercial banks, has a similar experi-ence. “The same promoters

and a similar working culture of the two banks were mainly responsible for the success of the merger,” said Laxman Risal, CEO of NIC Asia Bank.

According to him, the bank saw a growth of 22-23 percent in the first year after the merger. The growth rate improved in later years and the bank observed more than 50 percent growth in the net profit in the last fiscal year. NIC Bank and the Bank of Asia Nepal merged in June 2013 to form NIC Asia Bank.

It encountered occasional problems in data transfer from one system to another after the merger. But Risal said that they had been men-tally preparing the human resources of the two banks for the merger for one and a half years through joint training sessions and other initiatives which made staff manage-ment easier.

Meanwhile, an NRB study has revealed that some prob-lems also surfaced after merg-ers. In some merger cases, the promoters were found to have not followed the swap ratio of share allocation as per the due diligence audit (DDA). So the shareholders of the merged entity failing to push their agenda were forced to receive less than the actual value of their assets.

Failed mergerWhile the mergers between

NIC Bank and Bank of Asia, Bank of Kathmandu and Lumbini Bank, and Prabhu Bank and Grand Bank are success stories, there are also examples of high profile fail-ures of planned mergers.

The planned mergers between Machhapuchchhre Bank and Janata Bank and NCC Bank and Kumari Bank came to nought after they had received letters of intent from

the central bank.The merger plans were

dumped after the annual gen-eral meeting (AGM) of Machhapuchchhre Bank and Kumari Bank decided against it. A joint merger committee of Machhapuchchhre and Janata had decided to fix the swap ratio at Rs109 and Rs82 per share respectively based on the DDA. However, a group of Machhapuchchhre share-holders objected to the swap ratio.

Immense pressure from shareholders prompted the Machhapuchchhre board to ask Janata to maintain a new swap ratio of Rs100 to Rs45, but it was turned down. Consequently, the planned merger did not happen, according to officials of the two banks.

In the case of NCC and Kumari, a group of Kumari shareholders went against the proposed merger at a special general meeting. A sharehold-er who fiercely opposed the planned union told the Post that they went against it as the merged entity would suf-fer losses for three to four years after the amalgamation. “We saw that the operation cost would be too high due to a high number of employees,” he said.

These incidents prompted the central bank to take severe measures against BFIs that pull back from the merger after obtaining letters of intent. In a recently issued revised bylaw on mergers and acquisitions, the central bank has created a provision that could disqualify major share-holders from becoming board directors.

Likewise, NRB can bar such BFIs from going for mergers and acquisitions for a certain period, prohibit them from opening branch offices for three years and block them from getting any facilities from the central bank.

A senior NRB official said that such measures had to be taken as merger initiatives have started to collapse due to the personal interest of cer-tain group or influential indi-viduals.

With the deadline for meeting the paid-up capital requirement approaching, there has been a

surge in mergers and acquisitions lately

moneyIII the kathmandu post | Wednesday, September 28, 2016

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Banks unenthusiastic about productive sector loansBIBEK SUBEDI

Despite the policy-provision of Nepal Rastra Bank (NRB) requiring commercial banks to disburse 20 percent of their total credit to productive sec-tors, lending had reached only 16.52 percent as of mid-Au-gust.

The central bank though its monetary policy in July 2013 had asked commercial banks to maintain lending to such sectors at 20 percent by mid-July 2015. However, they have failed to increase their lending as required, and the central bank has been mulling introducing stringent law to penalize banks falling short of the target. Real sectors of the economy like agriculture, industry, infrastructure, small and medium enterprises and services are known as produc-tive sectors.

Although, bankers have officially welcomed the regu-lator’s move to introduce directed lending to productive sectors, in reality they have done very little to comply with the rule. In fact, bankers say that asking commercial banks to lend in such areas can be counter-productive as they can lose focus in their area.

“Banks automatically lend to the areas that are feasible,” said Upendra Poudel, presi-dent of the Nepal Bankers’ Association. “If certain areas are not feasible, then banks cannot lend in those areas. We don’t lend money from our pocket. Instead, we mobilize deposits collected from the general public.” So, we have be very prudent while extend-ing credit to any sector, he added.

According to bankers, if the government wants banks to inject funds into certain sectors, it should first make them capable of absorbing investment. They even warn about a possible systemic risk to the financial system if there is forceful lending to certain sectors. “If banks are forced to lend to certain sec-tors despite their viability, naturally their lending will be substandard,” said Poudel. “We even have to approve loan

proposals that fall below our standards.”

Bankers have warned that the loan portfolios of some banks are already not very healthy. “A large amount of substandard loans will pose a systemic risk to the financial sector,” said Bhuvan Dahal, CEO of Sanima Bank.

NRB, however, doesn’t agree with the opinion of bankers and says that without a growth in the productive sector, the banking industry cannot witness healthy growth in their own business.

According to the regulator, lending to real sectors is essential not only for econom-ic growth but also for the sur-vival of the banking industry. “We have noticed great slack-ness by banks when it comes to lending to productive sec-tors,” said a senior NRB offi-

cial. “Till date, we have not penalized banks for their ina-bility to meet the target set to lend in the real sector. We wanted them to follow the directive on moral grounds.” We are considering mulling stringent laws to penalize banks that fail to increase directed lending by the end of this fiscal year, the source added.

Bankers, on the other hand, said they would rather pay the penalty imposed by the regu-lator than increase lending to risky areas. “The day will come when banks will accept the regulator’s penalty instead of extending substandard loans,” said a CEO of a lead-ing commercial banks seek-ing anonymity.

Apart from the mandatory lending of 20 percent to pro-ductive sectors, the central

bank through this year’s mon-etary policy has asked banks to increase their lending to agriculture and hydropower to 15 percent from the previ-ously provisioned 12 percent. Currently, according to Dahal, the average lending of com-mercial banks to these two sectors amounts to around 12 percent, and it will be very difficult to increase it to 15 percent.

Since NRB has listed only two sub-sectors -- agriculture and energy -- under the head-ing, commercial banks have very few opportunities to issue loans. “Definitely, banks would like to increase their lending to the agriculture sec-tor,” said Poudel. “But there are obstacles preventing banks from going into this sector. With a large number of youth migrating abroad for employment, there is an acute shortage of human resources in farming.”

There are issues with regard to lending to the hydro-power sector too. Even if banks sanction loans for a hydropower project, it will take a lot of time for the actu-al disbursement when the pro-ject reaches the electrome-chanical phase.

The other major issue is the power purchase agreement (PPA) model adopted by the Nepal Electricity Authority (NEA). Banks will only lend to projects having a ‘take or pay’ model of the PPA with the NEA. Banks are not comforta-ble lending to projects having a ‘take and pay’ model. Under the ‘take or pay’ model, the NEA has to make payment even if it fails to buy electricity from the developer while under ‘take and pay’ model, the NEA has to make payment only if it purchases electricity.

The government is ready to adopt a ‘take or pay’ model for projects with a combined capacity of 2,700 MW. However, after crossing this mark, it is planning to adopt the ‘take and pay’ model. Banks are less likely lend to those projects if there is no guarantee that their produc-tion will get a proper market.

The industry will not advance without skilled human capital

The history of modern banking in Nepal actually started in the mid-1980s with the inception of Nabil Bank as the very first joint venture bank.

Within the next two years, two more joint venture banks, Indosuez Bank and Grindlays Bank, came into the picture. These multinational banks changed the banking land-scape for both entrepreneurs and those aspiring to make a career in banking. They were proactive in tapping locally available top talents and con-verting them into a skilled workforce of global stand-ards. This is evidenced by the fact that many of today’s banking leaders were in the payroll of one of these multi-national banks at a certain point in their banking career.

A structured recruitment process, systematic orienta-tion programmes on boarding and rigorous training inter-ventions were the key attrib-utes which helped these early multinational banks to devel-op seasoned talents for the industry. However, things changed post 2000 when more locally promoted banks came into the picture. In the cur-rent scenario, lack of skilled and knowledgeable human capital in banking at all levels has been a major challenge for the industry. This is due to rampant growth of the indus-try motivated mainly by short-term profitability and lack of long-term vision.

Pressure for rapid expan-sion, expectations of quick returns and inorganic growth coupled with intentional igno-rance of human capital investment has led to the knowledge and skill deficit in the industry. This has not only impacted core functional areas and made them prone to risk but also placed inexperi-enced hands who lack maturi-ty in terms of strategic think-ing, analytical skills and visionary leadership in lead-ership roles.

Unfortunately, the earlier practice of strategic recruit-ment, structured orientation on boarding and rigorous

training interventions to develop quality human capital seems to have been abandoned by all classes in the industry.

Variation in knowledge of banking basics among board members has led to the setting of tall orders for the manage-ment to achieve, and this does not look like a rational deci-sion. This tendency has put pressure on management to focus on short-term returns whereas priority should also have been accorded to long-term sustainability, succes-sion planning and talent development.

Succession planning is even more critical at top level executive roles, particularly that of the CEO and other line managerial roles. The absence of succession planning holds

an organization back as the resulting transition gap slows down its progress.

Even till date, most banks including those in the billion-aires’ club invest less than 1 percent of the total employee cost in training and develop-ment as against the interna-tional norm of 5-7 percent. The central bank has inter-vened through its recent mon-etary policy and made it man-datory for banks and financial institutions (BFIs) to set aside 3 percent of the total employ-ee cost under this head. Thus, it is expected that BFIs will take visionary steps towards this end.

The non-banking corporate sector is even way behind with regard to training inter-vention. Barring a few excep-tions, this is almost non-exist-

ent in many family-owned enterprises and business houses. Management trainee (MT) recruitment is one clas-sic example in Nepal’s corpo-rate sector. The whole idea of recruiting MTs is to prepare future leadership cadre and create a pool for succession planning. However, a quick glance reveals that most MTs are not given a conducive environment to grow and develop. A very few get oppor-tunities for strategic interven-tions such as strategy develop-ment, risk management, lead-ership and financial analysis skills.

BFIs should capitalize on the regulator’s intervention which has required them to invest a reasonable amount in human capital development.

As a start, the ideal move would be to reinforce the human resource (HR) depart-ment and upgrade the HR head position to that of at least deputy general manager or assistant general manager level under which separate divisions such as talent acquisition (recruitment/hir-ing), compensation and bene-fits (C&B) and talent & devel-opment (T&D) among others should be created. This struc-ture is ideally suited for com-mercial banks with a staff size of 600 plus as it would also justify their investment.

The increased capital will certainly exert target pres-sure on BFIs of every size and shape. The expectation of return on investment will thus increase even more due to the enhanced capital. Now

is the right time to initiate structured human capital development through struc-tured recruitment, orienta-tion on boarding and rigorous training interventions for newcomers and devise a career growth plan for the existing human capital through capacity develop-ment programmes such as training, certification in dif-ferent verticals including long-term management and leadership development. These interventions are expected to take the industry to the next level of stability and sustainability, thus ensur-ing healthy and progressive growth for stakeholders.

The bottom line is that without skilled human capi-tal, the industry will not move

forward. The capacity build-ing initiatives currently in practice put the sustainability of organizations under ques-tion. Thus, the goal is to con-tinue performing at a respect-able level, ensure a healthy return on investments, ensure proper compliance and gov-ernance, create new lines of business through innovations and technology interventions and increase efficiency and productivity. This can be achieved only through regular investment in human capital.

(Subba is CEO of National Banking Institute)

SANJIB SUBBA

banking special

Pressure for rapid expansion, expectations of quick returns and inorganic growth coupled with intentional ignorance of human capital investment has led to the

knowledge and skill deficit in the industry

According to bankers, if the government wants banks to inject funds into certain sectors, it should first

make them capable of absorbing investment

Home and auto loans surgeRAJESH KHANAL

Owning fixed property and automobiles has always been a desire for most people, and this aspira-tion is now within reach

as most banks have been pro-viding easy loans to fulfill this wish. As a result, lending in this segment, which had entered a gloomy phase a few years ago, has started witness-ing an upward trend.

Nepal Rastra Bank (NRB) figures show that the realty business has started picking up since 2014-15 with a surge in property lending. As per the central bank, real estate loan issue rose 5.64 percent to Rs63.87 billion in 2014-15. Loans jumped 30.8 percent to Rs83.60 billion in 2015-16. According to the data released by the central bank, real estate loans swelled 5.91 per-cent in the one-month period from mid-June to mid-July in the last fiscal year.

Likewise, hire purchase loans more than doubled dur-ing the period 2012-13 to 2015-16. Loans provided to pur-chase vehicles make up the largest portion in hire pur-chase lending. Hire purchase lending increased to Rs79.566 billion from Rs34.09 billion during the period. According to NRB statistics, lending in the segment grew significant-ly in the last fiscal year. There was a rise in hire purchase lending by 46.25 percent in 2015-16.

Bankers said that both property loans and auto loans, which had suffered a slow-down after last year’s earth-quake and during the Indian economic blockade, were on a rebound. Upendra Poudel, chief executive officer of NMB Bank, said lending in these sectors started heading upward after India lifted the four-and-a-half-month-long economic blockade. “Lending has increased also because banks have started offering loans at reduced interest rates, notably on real estate and hire purchase loans,” he said.

According to Poudel, a number of banks have been focusing on retail banking, in particular, personal loans. “At a time when banks are awash in excess liquidity, they have become attracted to making reasonable earnings through lending in sectors that have a relatively low risk,” said Poudel.

As per bankers, banks have been providing financing up to 80 percent to buy vehicles at interest rates as low as 4.5 percent per annum. Similarly, banks have been providing financing up to 60 percent to

purchase property at an inter-est rate of 6.5 percent per annum. Poudel said banks had become attracted to retail loans also due to the high mar-gin they can secure in the segment. “Compared to corpo-rate loans, retail loans ensure a high margin,” he added.

Bhuvan Dahal, chief execu-tive officer of Sanima Bank, said they were also issuing more loans to buy homes and land due to a surge in demand.

Currently, NRB has imposed a 25 percent cap on property loans on amounts over Rs10 million. Similarly, the central bank has main-tained a 10 percent ceiling on loans to buy land for plotting. However, there is no such restriction on home and land loans of up to Rs10 million. “This has also increased the

volume of loans being provid-ed to small investors to buy property,” said Dahal.

With changing lifestyles and continuing expansion of the road network, mainly in the Kathmandu Valley and major cities across the coun-try, demand for private vehi-cles has also been rising year by year. According to bankers, excess liquidity within the banking industry, lack of ample lending avenues and a relatively short loan periods are the major reasons behind the banking industry’s increasing attraction towards automobile financing.

Diwakar Poudel, head brand and marketing and cor-porate affairs at Standard Chartered Bank Nepal, said a fall in interest rates, launch-ing of diverse vehicles rang-

ing from entry-level to high-end models and simplification of the process to borrow money had helped loan demand in the segment to go up. Apart from easy financing and low interest rates, anoth-er reason for the upward trend in auto loans is the longer repayment period offered by banks and financial institu-tions (BFIs). “The relaxation in the repayment period has also contributed to the growth in sales.”

Earlier, most BFIs were offering a repayment period of five years. With growing demand for auto loans, most BFIs have increased the matu-rity period by two to three years.

Records of the Transport Management Office, Bagmati show that registrations of

new vehicles in Bagmati zone jumped 77.46 percent to 29,794 in the last fiscal year. Similarly, 74,465 two-wheelers were registered in fiscal 2015-16 compared to 63,386 in the previous year.

With the start of the earth-quake reconstruction process, there has been a rise in sales of heavy equipment such as cranes, dozers, excavators and loaders. As per the Transport Management Office, 863 piec-es of heavy equipment were registered in the last fiscal year. Meanwhile, registra-tions of heavy vehicles like trucks, tippers, tankers and

containers doubled to 2,240.Poudel attributed the surge

in home loans to lower bank interest rates and the end of unusual situation triggered by the Indian trade embargo. “Many property builders who were stymied by constantly changing government stand-ards and building codes have been encouraged to resume their projects due to the issu-ance of clear government pol-icy,” said Poudel, adding that they had been offering home loans at interest rates as low as 6.5 percent per annum and auto loans at 7 percent inter-est per annum.

money IVWednesday, September 28, 2016 | the kathmandu post

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banking special

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Anil ShahCEO, Mega Bank NepalCurrently, every banker is focused on increasing paid-up capital to Rs8 bil-lion as directed by the regulator. Once the capital is raised, they will a face challenge to boost their lending capaci-ty. Infrastructure, agriculture and tourism are the areas in which our bank would like to increase lending. Hydropower projects, cement factories and mining could also attract the majority of lending. We would also like to increase our investment in commercial agriculture. The services sector is another area which has a huge scope. However, banks can raise their investment in these areas only under the condition of a conducive business environment.

Upendra PoudelPresident, Nepal Bankers’ AssociationOnce the banks increase their paid-up capital to the required level, they will be under immense pressure to identify new investment areas. But I don’t think they will find such new areas overnight. However, hydropower is one area in which the banks will increase their lending significantly. Besides, their exposure to trading and real estate will increase. Tourism is another sector which has potential, and banks are likely to invest in big luxury hotels. Agriculture is an area that needs investment, but it would be difficult for the banks to invest in the sector. Lack of human resources has hit agriculture very hard. Exodus of youths for foreign employment has created an acute shortage of labour in the sector.

Bhuvan DahalCEO, Sanima BankAfter the banks meet the paid-up capi-tal requirement, they will be under tre-mendous pressure from shareholders to increase their lending capacity. Their capacity to lend will increase capital-wise, but if deposit do not increase along with the capital, it is impossible to increase lending. The Nepal Rastra Bank (NRB) gave two years to the banks to raise their capital fourfold, and they will comply with it. But it is impossible for the banks to increase their deposit collection fourfold within that time. The banks are already under pressure to increase their lending. They are doing it by compromising on the quality of loan. This can create a bubble in their asset, building more risk in the financial system. Currently, investing in hydropower projects is the only option that banks have to increase the volume of their loans and advances.

Diwakar PoudelHead, Brand & Marketing and Corporate Affairs, Standard Chartered Bank NepalWe have to increase our paid-up capi-tal Rs 8 billion as provisioned by the regulator. Once we increase our capital base, definitely we have to increase the business as well as maintain the cred-it/deposit ratio. We have our own chal-lenges to grow our business. In order to overcome the challenge, we are doing internal homework and explor-ing new areas of investment. As of now, we cannot reveal our business strategy regarding the new areas that we are considering to extend our lending to.

Anil GyawaliCEO, Global IME BankThere are not many areas for the banks to extend credit. Hydropower has been one area from where the banks are getting some loan proposals. Apart from it, the banks have compete with each other get a larger slice of the same pie. There is high chance for the quality of loans to deteriorate, pos-ing risk to the industry. However, in our case, since we are increasing our paid-up capital through merger, our depos-its and lending will also grow. So we will have to face less pressure to boost credit compared to those banks that are increasing their paid-up capital through right’s share issuance.

Kishore MaharjanCEO, Civil Bank With increased equity, the banks will be under pressure to increase their return on equity for their sharehold-ers. The hydropower sector is an area that has huge demand for credit. Within three years, this sector will wit-ness the largest exposure from the banks. Similarly, the manufacturing sector—especially the industries related to construction materials—will also see

Nepal Rastra Bank has brought a policy-provision, under which commercial banks have to raise their paid up capital to Rs 8 billion by the end of this fiscal year. Increasing the capital base will pressure the banks to boost their lending volume. Against this backdrop, the Post caught up with some of the prominent bankers to know about their plans.

increased lending from the banks. The trading sector will also witness some growth. Home and automobile loans are picking up with great pace these days. The hospitality sector is another area which show-ing growth. Big hotels and resorts are coming, and the banks would be happy to extend loans.

ToTal crediT To real esTaTe, hire purchase 2012-13 2013-14 2014-15 2015-16real estate loan rs 86.06 b rs 82.48 b rs 85.67 b rs 108.07 bhire purchase loan rs 53.93 b rs 63.65 b rs 80.96 b rs 110.09 b

2012-13 2013-14 2014-15 2015-16real estate loan rs 63.04 b rs 60.46 b rs 63.87 b rs 83.60 bhire purchase loan rs 34.09 b rs 41.02 b rs 54.40 b rs 79.56 b

2012-13 2013-14 2014-15 2015-16real estate loan rs 12.86 b rs 12.77 b rs 13.11 b rs 17.27 bhire purchase loan rs 13.30 b rs 15.90 b rs 18.97 b rs 23.68 b

2012-13 2013-14 2014-15 2015-16real estate loan rs 10.15 b rs 9.24 b rs 8.68 b rs 7.19 bhire purchase loan rs 6.53 b rs 6.72 b rs 7.58 b rs 6.84 b

commercial Banks

developmenT Banks

Finance companies

Apart from easy financing and low interest rates, another reason for the upward trend in

auto loans is the longer repayment period