THE ASTUTE BANKER & Sunil Kc

Sunil KC is the CEO of NMB Bank and his leadership is considered visionary with astute business intelligence. He joined the bank in 2008 and became the CEO in 2017. In the wake of the coronavirus, much like every other aspect of life and economy, the banking sector does not remain unscathed. The pandemic had generated high economic instability and volatility and has adversely impacted the overall banking sector including valuation and profitability. The first quarter (Q1) of ongoing fiscal 2020-21 paints a gloomy picture due to extension of credit repayment, plummeting loan demand, and rise of non-performing loans. Banks are at a critical juncture but despite shrinking profitability, they are trying to maintain overall financial stability without compromising on service delivery. The return in equity witnessed an all-time-low at just 3.01%. In the first quarter 18 banks out of 27 commercial banks in operation faced decline in profits compared to the corresponding period of the previous fiscal. Some banks expanded their balance sheet due to merger and acquisition. While corrective actions of the government aim to mitigate risk profiles, the sector is not left without mounting challenges. NMB Bank resorting to a big merger has accelerated lucrative profit growth of 168.65% in the review period. NMB Bank is licensed as “A” class financial institution by Nepal Rastra Bank in May 2008 and has been operating for over 20 years, now recognised as one of the leading commercial banks in the country. The Bank has a Joint Venture Agreement with Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO), wherein FMO holds 13.69% of the Bank’s shares and is the largest shareholder of the Bank. In September 2016, the Bank signed a Joint Venture Agreement with Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden (FMO), the Dutch development bank following which FMO became the single largest share holder of the Bank. The alliance with FMO positions the NMB Bank in becoming the market leader in managing environmental and social risks and the leading player in renewable energy and agribusiness. NMB In a recent initiative on October 21 under One to Watch with support from the Swiss Agency for Development and Cooperation (SDC) and in partnership with Laxmi Bank, NMB Bank announced the launch of Covid 19 MSME Fund Nepal. The Fund seeks to support MSMEs that are struggling to cope with the challenges brought forth by Covid 19. It will do so by providing them with bridge financing in order to meet the working capital needs and technical assistance in the form of business development services to be able to retain employees, preserve business continuity, and build resilience. The Fund is expected to support up to 100 MSMEs continue their businesses and help them retain up to 1000 jobs. With many progressive and strategic initiatives under its belt NMB Bank recently also set precedence to become the sole bank in the country to sign an agreement with Chinese tech giant Tencent Holdings Ltd, developer of Chinese multi-purpose messaging, social media and mobile payment app- WeChat.With this partnership NMB Bank becomes the Tencent authorised partner to bring WeChat Pay Service in Nepal. Sunil KC is the CEO of NMB Bank and his leadership is considered visionary with astute business intelligence. He joined the bank in 2008 and became the CEO in 2017 prior to which he was associated with the Standard Chartered Bank. In the edition of Business 360, he shares some insights into the banking sector with our readers. Excerpts:

What are some of the upside and downside risks of the Covid 19 pandemic in Nepal’s financial sector?

The Covid 19 pandemic has created unprecedented stress in the financial sector of the country and vastly impacted the way we live and work. Nevertheless, the pandemic has paved the way for envisioning a different normal with a transformation in the approach of doing banking. It has increased awareness and the exponential growth in digital banking, thereby allowing banks and financial institutions to be more cost-effective in delivering the right product and service to its customers. It is also an opportunity for BFIs to be prepared for such future shocks, respond to the crisis and mitigate challenges by revisiting the business model or migrating to new business architecture. The pandemic has also enabled BFIs to be efficient in managing the cost. I believe this pandemic situation and restriction in international movement could be instrumental in driving the country towards self-sustainability by creating employment opportunities through local entrepreneurial activities, and other infrastructural development by mobilising the available resources within the country and promoting agri-business, domestic service sector for self-reliance. This is also an opportunity for the government to rectify macro imbalances such as trade deficit, particularly with India and China, current account deficit, and the overall balance of payment. The Covid 19 pandemic has brought out the worst for economic sectors hitting a snag in the overall growth trajectory. The pandemic with the prolonged lockdown, economic downturn, and elevated uncertainty has greatly impacted the profitability of the banks and financial institutions. From halted operations to rising employee health and safety issues, we face numerous challenges in the smooth functioning of the bank. Likewise, most business sectors where we have our loan exposure have suffered an enormous setback in their cash flow. The restricted economic movement and disrupted supply chain amid lockdown and degrading consumer confidence has pushed many industries and businesses on the brink of collapse putting tremendous pressure on interest collection and loan recovery for the banks as we expect unemployment to increase and the income of the people to decrease. Moreover, banks will have pressure to grow their business portfolio as most traditionally lucrative businesses will suffer sustainability crises. The emerging sectors will still be in the process of establishing market credibility. We expect that uncertainty will prevail for some time in business sectors, thus putting forth a severe threat to financial institutions.

With the country’s economy facing manifold challenges, how long can the banks maintain resilience?

The pandemic has forced banks to explore different avenues of sustainability and growth. From cost management to operational transformation, safeguarding workforce to expanded use of digital technologies in business is a matter of survival for the banks. While the pandemic has devastated the entire economy of the country, banks including NMB, have already focused on business continuity and adaptability learning new ways of serving customers and managing business in the changed context. Although the pandemic has put stress on profitability, I expect the banks to show greater resilience in doing business and do not foresee immediate setbacks. The banks are adequately capitalized with a sound average capital adequacy ratio of 14%. The majority of the loans are adequately backed by collateral with no immediate threats of loss. There is surplus liquidity in the tune of Rs 160-180 billion in the system to manage the challenge of short-term cash flow mismatch. Moreover, banks have already witnessed such an economic crisis in the past, making them resilient towards the crisis posed by the Covid 19 pandemic.

What could be done to avoid potential forthcoming risks?

I believe the government should implement a multipronged strategy to support key sectors such as agriculture, hydropower, tourism, etc. that contribute to the real economy. The maneuvers to revive the economy have already been presented through the budget and monetary policy. It is now time to increase the spending in infrastructural development, especially the health sector and execute national level infrastructure projects to generate employment, enhance economic activities and increase consumption. I also believe that there should be further liberalisation in off-shore borrowing policies for banks and support in developing the bond market. We can also leverage the currently low debt/GDP ratio and healthy forex reserve ratio to source external funds for sustainable growth. As this is an emergency situation that has impacted almost every economic sector, we can introduce a stimulus package along with already announced relief supports for businesses that could also help the banks to control and manage its delinquencies and potentially degrading asset quality. There should be added stimulus package for SME/MSME business and cottage industries both within the banking net and the unorganised sector for sustainability and equitable inclusion.

The government is going to mobilise around $200 million credit offered by the World Bank Group in the near term to support enhanced supervision of risks confronting the banking and financial institutions, especially in the context of the pandemic impacts. Do you think that the supervisory capacity enhancement and regulatory reforms are enough to stabilise the financial sector?

The impact of the Covid 19 pandemic is severe making it challenging for almost every economic sector to recover. The GDP growth of the country that was heading towards 6%+ growth for the fourth consecutive year got contained at 2.28% in the previous fiscal year. The World Bank for the years 2020 and 2021 has projected Nepal’s economy to grow only 0.2% and 0.6%, respectively. The pandemic has already cost a lot to businesses with a considerable loss to the economy that could take years to recover. In this turbulent time where the government requires to protect its citizen’s health first as well as balance the economy, mobilizing any amount of relief support is good for the smooth functioning of the financial sector. I am sure the government has plans for survival, revival and growth of business sectors as well as banks, and will introduce many other stimuluses in the future for the financial stability of the country.

In the first quarter of FY 2020-21, NMB bank witnessed a profit growth of 168.65% despite the turbulence seen in the market. What does this profit growth indicate?

If you look at the past five-year trend, NMB has been consistently delivering the best results with sound financial indicators, including profitability. Our performance in the first quarter of this fiscal year is attributed to a persistent effort of prudent management practices over the years, better assets liability management, diversified risk assets portfolio, robust internal efficacies, and result-oriented employees. The Bank’s effectiveness in cost management and prudent practices in lending, and sectoral focus particularly towards energy, real economy sectors, SME/MSMEs and export-oriented industries, helped us achieve a relatively better result than the industry average despite the prevailing economic challenges and impact of Covid 19. This consistent growth means not only our commitment towards sustainability, continuous improvement in our internal ethos, and best return to our shareholders but also means inspiration for the overall industry in general.

What would be the impact of regulatory flexibility given to borrowers like relaxation in loan repayment, interest capitalisation etc?

The regulatory flexibility given to borrowers in this pandemic situation and potential relaxations post-pandemic period will help businesses to gradually revive. It will also help increase business confidence thereby creating a foundation for the quick recovery of the economy. However, it is essential to have close monitoring of utilisation of funds and cash flow trapping of such businesses to avoid any future surprises that could jeopardize banks investments. The list of top profit earners has changed and newly established banks are fast gaining momentum. Do you think the dynamics of the market has changed with increase in merger and acquisitions? In the past few years, with increasing awareness customers have become more demanding and the way of doing banking has changed. Today, the strength of the bank lies in its ability to create customer loyalty through customer experience. Further, decentralisation in economic activities in federated Nepal and changing business dynamics have created new opportunities in suburban and rural markets in the past few years. In the changing context, Banks who have been focusing on suburban, rural markets in SME/MSME and Retail segments through digitisation for sustained growth are emerging as new leaders in the industry.

The average return on equity of the banks is going down while once banks were considered the most lucrative in terms of profit. What are your thoughts?

Indeed, the average ROE of banks have been gradually decreasing over the past 5-6 years. The average ROE of the industry in FY 2015/16 was about 22%; it has come down to only around 11% at present. And the reason if you contemplate is apparent. First, there has been an injection of new capital in the system where the banks were required to raise their capital from Rs two billion to Rs eight billion. Second, there is a regulatory cap on interest spread and fee-income. Third, banks have expanded to rural areas with their footprints in all 753 local levels as required by the regulatory body that consequently increased the cost for the short term. Fourth, banks have reduced interest rates, provided rebates and discounts on interest to borrowers as Covid support, thus directly impacting the return. Whilst the ROE of the banks has been on a decreasing trend for the last couple of years and that could be discouraging for short-term investors; it will continue to remain attractive for medium to long-term investors as banks are expected to perform better post-Covid scenario.

Your comments on the practice of banks having lowered interest rate for depositors while lending rate remains high.

The interest rate market in Nepal has always been volatile due to numerous market factors directly or indirectly impacting the liquidity. It’s true that in the past few months, deposit interest rates have been lowered by the banks; however the lending rates have also been significantly reduced to pass on the gain to the borrowing customers. Compared with the pre-Covid period, the average lending rate of banks has been decreased by more than 200 bps with currently average lending rate at just 9.8% p.a. If you reckon, NMB has reduced its overall lending rates by more than 3% as this is a time to be compassionate towards our clients businesses and overall economy of the country. Moreover, the banks have started offering fixed rate loan products that is expected to stabilize the interest rate in the market going forward.

It is reported that the banks are flushed with liquidity as they are operating on an average of 73-74% credit to core capital cum deposit ratio. This is despite the Monetary Policy of this fiscal which has allowed banks to lend up to 85% of the core capital plus deposit.

As I have said earlier, the banking system currently has excess liquidity to the tune of Rs 160-180 billion, and the market is expected to remain flush in the short term due to the low credit demand of the private sector marred by pandemic uncertainties. Besides, the flush liquidity position during the crisis is a positive sign as it will support the revival of the economy by providing relief support to the businesses facing problems. The Central Bank’s role in combating the crisis through market operation generating liquidity has been effective and praiseworthy. This has also helped to maintain depositor confidence in the banking system during the crisis.

While coming to the end of first quadrimester (mid July to mid November) credit expansion is at par with the corresponding period of the last fiscal. Can we expect improvement now onwards?

The impact of the pandemic to our country’s economy and its aftershocks post-pandemic is expected to reecho for some years that could disorient the economy if all the sectors do not come together respecting other’s existence. For the first time in five years, deposit growth in the first four months of the fiscal year exceeded the loan growth which is not a good sign for overall economic growth. However, we can expect a gradual improvement in the overall business scenario in the second half of the current FY 2020/21 if there is no second wave of Covid. Key drivers for demand viz. remittance and service sectors are showing positive signs of recovery. Likewise, increase in capacity utilisation of local manufacturing industries, adequate power supply, and normalisation of imports post lockdown would ensure smooth supply in the coming days. Also going forward, with successful vaccine tests around the world, we expect positive sentiments to boost business confidence and overall demand for credit.

Various projections paint a gloomy picture of country’s economy for two consecutive fiscal years including the ongoing fiscal, what sort of contingency plan is required for this period?

In this turbulent period, the government should play a proactive role in creating aggregate demand through enhanced public spending in major infrastructure projects, thus mobilising the resources in the country. The funding gap could be fulfilled through external borrowings. There should also be plans for growth-enhancing revenue policies and bringing the informal channel into the mainstream. The government should focus on timely completion of existing infrastructure projects and create more jobs within the country. The government could also take steps to discontinue the existing subsidy on gas, diesel, etc. to support local clean energy production.

The Central Bank has been repeatedly asked banks to be flexible towards borrowers hit hard with cash flow crunch. Is this regulatory requirement being met?

Not only the banks but all the business community needs to be compassionate and support each other’s businesses as we need to come out of the crisis together and strong. We, the private sector business, must realise that we all should be part of solutions rather than just relying on the government to manage all the problems. The banks have always been playing an important role in the smooth functioning of the economy. The banks have been offering lending solutions to Covid impacted businesses in the form of rescheduling and restructuring, rebates and discounts, interest rate cuts, etc. as appropriate support. We understand that its survival depends upon the survival of business entities and the economy as a whole and that the business community’s problems are our shared problems as well. Thus, it is always ready to lend its support and provide an advisory role to borrowers even if it’s bottom-line is impacted for the common good. And as we expect businesses to pick up, certain cash flow gaps and debt servicing needs will be addressed for the sustainable recovery of the borrowers.

NMB bank has relatively larger exposure in the priority sectors like hydropower. The gestation period of bank-financed hydro projects could be longer due to pandemic. How will you support them in this situation?

NMB is amongst the leading banks in terms of hydro project financing in Nepal. The Bank has financed 44 hydropower projects of which 22 projects have already started producing 131 MW of electricity. The total installed capacity of these projects at present is approximately 1,300 MW. The pandemic has delayed the construction of hydropower due to prolonged lockdown, fear of virus transmission amongst workers and their unavailability due to restricted movements. The time overrun due to a pandemic crisis that was beyond the control of developers is expected to increase the cost of hydropower construction. We have already discussed with clients how to address any potential future challenges on a case-to-case basis through rescheduling, rebate, lowering interest rates through refinancing, blended finance, etc.

The Monetary Policy has offered around Rs 200 billion refinancing package; the government has recently endorsed guidelines of the Rs 50 billion fund from which tourism-related businesses and SMEs can avail subsidised credit. Despite availability of the credit, why is the private sector reluctant to avail loans?

The first tranche of the same i.e. Rs 60 billion has been approved recently by the Central Bank. For the Rs 50 Billion fund, the policy and procedure has just been released. The reluctance could be due to the short-term period on the lowered interest rate and the generalised categorisation of the impacted sectors across different regions and topography. The government along with the refinancing package should also come up with financial stimulus for generating economic activities that will eventually increase demand in the market.

Do you think the monetary interventions are enough to cope with the economic hazards caused by the pandemic?

The impact of the pandemic on the economy is yet to be felt at full extent as uncertainty still looms despite the talks of vaccine development. In this crisis, one cannot say whether the monetary interventions were enough to cope with the economic hazards caused by the pandemic. The interventions need to be regularly introduced as and when required to effectively target the impacted business for their recovery. A blended approach between the fiscal and monetary side would always be more effective. A direct stimulus package needs to be provided to support the survival of the small business and other informal sector business along with a special package for agriculture, tourism and other key sectors that can directly contribute to the real economy or support local production, supply, and job creation. This monetary side support could complement the fiscal support in the form of tax exemption or deferrals, sovereign guarantees to indigenous producers and agriculture production, and expedite budget spending for equitable distribution of the income. Given the constraint in internal resources, the government should leverage on the strength of current financial position to bring in external funds. A national socio-economic recovery plan should be formulated to promote a favourable business climate, facilitate Foreign Direct Investment, and foster high value added sectors.

NMB achieved the Bank of the Year title for 2020; the third time. What are the exclusive values NMB Bank has been promoting in the banking fraternity?

NMB Bank is recently recognised as The Banker’s Bank of the Year 2020 in Nepal by The Financial Times, London. This is the third time the Bank has been able to bag this most prestigious global financial award in the last four years. Today, NMB Bank is one of the most trusted and sought-after names amongst international banks and financial institutions and probably one of the most preferred domestic banks by regulators and customers. As a member bank of the Global Alliance for Banking on Value (GABV), we are driven by the value-based banking principles and always focus on meeting human needs by providing accessible banking services to all individuals and enterprises, delivering value society. We believe that as a responsible corporate citizen, banks should drive positive economic, social, and environmental impact in the country. NMB has always been supportive in serving the needs of the real economy, providing accessible lending supports to high priority sectors such as energy, agriculture, SME/MSME, and other productive sectors that helps in generating employment in the country and deliver value to the nation’s economy whilst promoting sustainability in the investment decisions. NMB Bank highly values innovation in changing times to deliver results together. Providing the best of the services to its customers through onsite and highly secured alternative delivery channels has always been the practice of NMB Bank that is well reflected in our digital/AI-enabled banking services and ISO certification for Information Security Management. We believe that banking is a serious business as it involves people’s money and therefore should be transparent to its stakeholders and accountable for its decisions. In addition to this, we believe consistency is the key to survival and that a bank should always focus on delivering the best returns to the stakeholders.