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What Banks Need to Become

The Nepali banking industry has travelled some distance ever since the three foreign banks forayed into our small, largely untapped economy three decades ago. I am fortunate to have been a part of this journey for over 24 years. These days I occasionally get an adrenaline rush as I watch this sector from the other side. Here is my perspective on what currently ails the banking sector and a few points to ponder.

Banks are torch bearers
We as a country have squandered prospects for accelerated growth over and over again during last three decades of misrule, poor governance and apathy. Our GDP has grown from USD 2 billion back in the 80s to USD 20 billion now – a small growth compared to what could have been, that too largely in spite of the government. The banking sector has not only been a pillar of this predominantly private sector led growth but also a major beneficiary. On the other hand, with lack of investments in infrastructure, absence of adequate structures and a financial system that is heavily skewed towards banking, there is no denying that banks have contributed to creation of asset bubbles time and again resulting in increased income disparity between the wealthy and the poor. Amidst chaos, inequality, freedom of speech and lack of investment avenues, banks are under tremendous scrutiny from all quarters and must brace for possible tectonic shifts in the banking landscape.

Shareholders have been enriched
Private entities and individuals comprise a significant part of bank shareholders in Nepal. As banking sector performance overall has been robust and steady over the years, not only in terms of balance sheet growth but also on the stock market, many key shareholders have become wealthier. It has helped them support and expand their business and investment portfolio taking advantage of asset bubbles and business environment rebounds that come about almost every alternate year. Most of the wealthy in Nepal are richer today than they were 30 years ago by a multiple far greater that the 10 fold GDP growth the country has witnessed.

Regulatory forbearance
Shareholders are naturally keen to ensure that their banks remain commercially oriented, which in itself is alright, as profit is an important factor in strengthening a bank. But excessive chase for profits tends to compel professional management to take short cuts. Nepali banks have gotten away with bad behaviour on numerous occasions, usually with a little help from the Central Bank. To my mind, incidents of regulatory forbearance are far too many; they protect weak banks and therefore disincentivise efficient, prudent practices. A recent case in point is adjustment of credit-deposit ratio to accommodate banks that failed to meet the requirement that triggered a credit crunch owing to aggressive lending behavior and lack of prognosis. One cannot fault the Central Bank for trying to prevent a systemic risk but in an over-banked economy like ours, one or two banks must be allowed to fail every now and then. Shareholders, regulators and professional managers together are responsible for ensuring that banks remain strong and the banking industry robust. Among the three actors, professional managers assume by far the largest responsibility. They not only need to self-regulate but also ‘spine-up’ to excessive influence of key shareholders seen in a few banks.

Inadequate human resource
The challenge however is that our banking manpower hasn’t exactly grown in terms of capability commensurate with growth in other dimensions. It is not only about training. Other than skill transfer that occurred with entry of the three foreign banks, there has been no major boost to banking talent pool. The industry suffers from deep in-breeding. Almost all of the middle, senior executives today have been around for 10/20 years. Banks need injection of fresh talent, experience from other markets from time to time. We are inward-focused and are not prepared to think big or innovate. Some of the new initiatives I took up during my time (eg., mobile money, peer to peer lending, collateral free loans) were perceived as either ahead of time or lacked regulatory appreciation. But my submission is that banking sector as a whole should think big and continuously meet the market with innovations and big ideas in order to make the market responsive.

Innovation, digitiSation and payments systems
One way to think innovation is to expedite digitisation. Most millennials are already financially empowered, many of them drive businesses or are at the threshold of doing so. Banking habits are changing before our own eyes. The preference for digital is pervasive across all customer segments. Banks that don’t go digital will die. It is a pity that mobile money eco-system has remained painfully small even after 10 years of introduction. I will not be surprised if this space gets taken over by telecom companies and bank-led models go dormant in not too distant future.

Our banking industry is lagging miserably behind in payments systems. Urgent effective action is required to facilitate online payment systems powered by robust payment gateways. All modern day companies have presence in the digital space with capability to sell online. Nationwide payment systems will not only bring in more money into the formal economy but also help banks work with small businesses better. Almost all banks in Nepal have SME focus but aren’t approaching this segment any differently. A reliable payments system helps banks track cash flows of small businesses leading to gradual departure from collateral based lending.

Linkage to real estate
Real estate and Nepali banks have a very strong linkage, mostly due to lack of transparency thus the need for a strong second way out to cover credit risk. However, this is a key reason why very little product innovation has happened on the debt side. As significant portion of loan books are tied to real estate, directly or as collateral, banking industry as a whole has avoided high NPA levels for last several years. Remittance induced liquidity, access to credit, rapid urbanization etc are the reasons why the real estate market has historically retained a long term positive outlook notwithstanding short crashes. But this deduction could be challenged by a change in government policy (eg, revision in inheritance law) or stable political environment prompting infra spending. As it is, banks need to be cash flow driven in their lending hence this behavior to lend against collateral only must change sooner rather than later.

Thriving in chaos
Finally, I would urge captains of the banking industry to refrain from pointing blaming fingers at the regulators and the government when the going gets tough. The banking industry has come this far against many odds. As millions of Nepalis do on a daily basis, we need to forge alliances, innovate, and continue to thrive in chaos.


Suman Joshi is an ex banker who started his career with ANZ Grindlays Bank and went on to become the youngest CEO at Laxmi Bank. He is currently Founder & Chairman of True North Associates.

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