New Business Age, September 2007
Siddhant Pandey, CEO, Ace Development Bank, spells down the strategies of his company after it recently upgraded officially to a development bank from a finance company.
What are your plans for now after being a development bank?
The limited area of operation as a finance company was very restricting not only in terms of capital but also in terms of products and services. The upgrade has changed all this drastically. Now we can provide various services including multi currency transactions, traveler’s checks, debit and credit cards, ATMs, over draft facilities, current account, personal loans, locker facilities, e-banking, etc. With the capital increment our single borrower limit has increased three folds, which is going to enable us to have larger exposure in various projects. We are also planning to get very involved in micro-financing. In a nutshell our risk capacity has increased. The most significant risks to continuing growth currently relate to political and macro events which are outside our control. Recognizing that the effect of such risks materializing could be immediate and potentially severe, we remain strongly capitalized and liquid.
How are you going to use the massive increment of Rs. 230 million in the paid up capital?
The actual increment in term of cash was Rs. 196 million through our Rights issue. The Rs. 34 million addition to the paid up capital was through a bonus share dividend of 40 per cent that we declared in FY 2005-2006 before the Rights were issued. We are already making use of our funds, which can be seen through our high Credit to Deposit ratio. Our policy is to grow gradually with risk mitigation being the foremost factor.
What changes have you made in the organizational structure, human resource and market access to achieve the objective of profitably utilizing the additional capital?
The changes in the organization structure and recruitment of staffs to facilitate the growth have been taking place for the past year. We built our own building to meet the requirements of a development bank. The various new market areas we are penetrating has been facilitated by various departments which have been formed to meet those targets and expectations. Policy manuals and guidelines govern each and every department and the staff follow them in concert. Team work is expected from the staff members. For instance, for the past six months we have concentrated on the Merchant Banking activities, for which new staff were recruited to lead that department. Our treasury department works very closely with the Merchant banking department as does the credit and business development departments. There is a inter linkage between the various departments to lead the company to success. The newly formed compliance department ensures that good governance is consistently in practice.
What are going to be the major competitive strategies of Ace Development Bank? Rates, technology, branch network, range of services or something else?
In a highly competitive market we have to continue to evolve. However, the problems that belie that are a) small market and b) restrictive regulatory constraints on innovative financial products. In terms of reinventing the wheel, we will be providing all the facilities that the other development banks are providing as I mentioned earlier. In terms of being innovative, we have applied to the regulators for permission for a few products that will be different and we are awaiting their permission. These products will be concerned with infrastructure development and micro financing. Micro finance is an area I would like to get Ace Development Bank heavily involved in.
Our first branch will be in operation by mid-September in Birgunj and after that there will be another venue that we will open up, which awaits permission from NRB. The plan is to set up, at least, two branches in the first and second years and three thereafter.
If the regulatory bodies do not evolve then the question of development in the financial sector will be shunted and all we will see is growth and no development. What then will be our next trick in the banking industry? To invent fire?
Will you continue with the merchant banking services even after becoming a development bank?
We are now the only development bank with the license to undertake merchant banking activities. As I mentioned earlier we will continue to be aggressive in this area.
What explains the nearly 11 percent decline in the net profit of the company in the fiscal year 2006-07 compared to the previous year? The financial summary for 06-07 also shows a massive decline in the other operating income as well as in other operating expenses. How is it so?
The operating profit before provision increased by 14% in FY 2006-07 as compared to corresponding year. However, the net income decreased by 10.6 percent due to the heavy depreciation on the new building and equipment. There has been across the board increase in deposits, lending, fee income etc. The other factor that we could not capitalize in as in the previous year was the profit from sale of shares (44 million) and provisioning write back (38 million). In 2006-07 we had a total NPA of 1.15% as opposed to 1.51 the previous year.
The development banks and finance companies seem to be virtual commercial banks as they all are allowed to operate checking accounts. In this context, how logical do you think the current system of dividing them into categories?
There is a vast difference in the product range between a finance company and a development bank, but between a development bank and a commercial bank the only two activities that we cannot undertake are opening letters of credit and loan hypothecation. Finance Companies cannot give overdraft facility or give personal loans. Also the multi-currency transaction, demand drafts and the like are also not permitted. The division by category is only based on the capital structure and therefore seems to be the only parameter to weigh risk. Due to the lack of a credit rating agency, this seems the only method however illogical it may seem. Some “C” class institutions are performing better than some “A” class commercial banks. It is imperative that an independent credit agency be set up so that the public will be able to assess the risk methodologically.
How do you feel about the complaints from various quarters of the society including the NRB and the Finance Ministry that the banks and financial institutions are not going to the rural areas and not helping the SMEs? How well-founded is this complaint? What are more practical approaches to provide financial services to the rural areas and the SMEs?
There has to be a different directive governing loans and advances to the rural sector. The present rules dictate that collateral is a prerequisite. If the project is good and you base the loan on the future cash flow then the regulator will make you provide heavy provisioning. In order for the private sector banks to enter such a market there needs to be some malleability to the present directives. The new monetary policy has mentioned some improvements; but we have yet to see the new directives.
Looking at the future, hopefully peace will prevail and due to the competition it will be imperative for the banking sector to start penetrating the rural sector. Ace Development Bank has a strategy to commence operations in the rural sector. For which we plan to partner with rural communities.
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