Bank CEO Salaries

Bank CEO Salaries
29-Nov-10, TKP

Following Nepal Rastra Bank’s much publicised move to cap the salaries and benefits of chief executive officers of banks and financial institutions, interest in how much they actually earn has grown.

According to details obtained by the Post, the top dogs pocket Rs 585,000 to Rs 25.24 million a year. Among the 27 commercial banks in operation as of the last fiscal year, Standard Chartered Bank Nepal’s CEO Sujit Mundul earns the most while the management chief of Nepal Bank Limited who was appointed by the central bank has the smallest salary.

It means that 27 CEOs have salaries ranging of Rs 45,000 to Rs 19,42,000 a month. Their monthly average salary stands at Rs 600,000 a month. These banks spent a total of Rs 210.55 million on their CEO’s salary in fiscal 2009-10. This amount does not include performance based pay and other perquisites such as expenses for vehicles and newspapers.

Among fully Nepali-owned banks, Radhes Pant, CEO of Kumari Bank, has the highest fixed salary. He gets Rs 1.04 million per month.

Although Standard Chartered Bank has the highest salary for CEOs, it is exempt from the central bank’s recently introduced guidelines as the chief is serving here under a technical service agreement (TSA) made with its parent bank.

As per the guidelines, the fixed annual compensation should be up to 5 percent of the total average expense for all employees over the last three years or 0.025 percent of the total assets the BFIs have maintained in the previous year, whichever is lower.

Bankers who have been opposing the central bank’s attempt to cap their salaries since the issue was floated are still crying foul. Kumari CEO Pant said such a rule could lead banks to hire more people and ramp up deposit collection and lending in order to increase staff expenses and assets so that CEOs could draw higher salaries.

“This will also discourage talent from entering the banking industry as top managers,” he said. When asked if his pay was higher than permitted by the guidelines, Pant said he would have to think about it.

Except for Standard Chartered Bank, other joint venture banks, Everest and Nepal SBI, pay their CEOs less than what most CEOs of private sector banks are getting.

Everest’s CEO P.K. Mohapatra gets Rs 106,000 a month. Likewise, the monthly salary of the CEO of Nepal SBI is Rs 117,000.

“Even if all other facilities such as accommodations are included, my salary does not come close to what some CEOs of Nepali private sector banks are getting,” said Mohapatra.

According to him, he does not get extra compensation from the parent bank Punjab National Bank in India except what has been written in the TSA. He, however, maintained that CEO salaries should be market driven and that the bank’s board should have the absolute right to fix them.

Government-owned banks and banks in which the government holds a stake pay less than private sector banks. They have been excluded from the central bank’s guidelines on salaries.

Nepal: a high altitude liquidity crunch

Nepal: a high altitude liquidity crunch
Financial Times, 17-May-2010
By James Lamont

One of the most striking things about Kathmandu, Nepal’s capital, is its real estate sector. Construction is rampant on the city’s edges as new suburbs push out towards the surrounding Himalayan mountains.

Teams of workers atop wooden scaffolding are transforming this ancient city, not so long ago the seat of a Hindu king, with three storey residential homes. So great is the boom in property that imported building materials are a big share in the mountain republic’s balance of payments.

And now the country’s banks are on a crisis footing.

The expansion, and sharply rising property prices, is not a sign of a healthy economy. The construction boom is fed by remittances by Nepalese workers sending money home from countries like Qatar, Malaysia and Thailand. These represent 22 per cent of GDP, and probably much more since only 1 per cent of remittances from neighbouring India go through official channels.

Much of these capital flows are by-passing Nepal’s banking system. Concerns over political instability, and the prospect of a Maoist-led government, have encouraged a flight to safety as economic growth falls. Likewise, a desire to avoid paying tax encourages a large informal economy of undeclared earnings.

Nepalese rather than putting their earnings in bank accounts are building houses, buying gold and depositing money in Indian bank accounts where they earn higher interest.

Nepal’s financial regulators are worried by the trend. They say the country’s banks are facing a severe liquidity crunch. They are encouraging local banks to offer more attractive savings rates to raise deposits and avert failure. Of particular worry is the number of banks for a small nation of about 23m people. There are 26 in total and many are owned by wealthy families with other business interests. As worrying is the proliferation of largely unregulated savings cooperatives about which much less is known.

Nepal is, of course, a long way from New York and on the fringes of the world’s financial system. It usually takes its economic cues from India, which sidestepped the global financial crisis thanks to its conservative regulatory approach. Nonetheless, two years after the fall of Lehman Brothers, Nepal stands on the threshold of its own banking crisis.

Yuva Raj Khatiwada, governor of Nepal’s central bank, has been in the job only two months and identifies bringing liquidity from the economy into the banking system as his top priority.

He has a mountain to climb, and knows it.

“Nepalese have the tradition of learning lessons late. We don’t have the habit of pro-activeness and even if we do react we do it in a belated way,” he says.

Door open for foreign banks to set up shop in Nepal

Door open for foreign banks to set up shop in Nepal
Nepalnews, 1-Jan-10

Foreign banks are allowed to expand their physical presence in Nepal through branch offices beginning from Friday.

As per Nepal's commitment made to the World Trade Organisation (WTO) during its accession on April 23, 2004, foreign banks can make their foray in Nepal to do only wholesale banking from Jan. 1, 2010.

According to a new policy of Nepal Rastra Bank (NRB), foreign banks willing to open a branch in Nepal are required to bring in at least US$ 30 million (Rs. 2.24 billion) to get a license to start banking services here.

Similarly, banks are required to invest at least another US$ 5 million (Rs. 374 million) for each branch they want to set up here.

According to the central bank, the capital requirement was fixed as per the WTO's principle of national treatment for foreign companies.

NRB has defined wholesale banking as deposits above Rs. 100 million and lending above Rs. 300 million.

Foreign banks wishing to expand their presence in Nepal must be at least 'B' rated as per the evaluation of international rating agencies such as Moody's and Fitch, as per NRB policy.

They are also legally bound to produce a no-objection letter issued by the regulatory authority of their home country to apply to open a branch here.

Foreign banks are also obligated to follow the rules and regulations of NRB. They can repatriate their profits to their home country after paying taxes, fees and other liabilities as per the laws of Nepal. But they have to obtain the approval of the central bank before taking away the income.

The NRB policy also states that branches of foreign banks which are scrapped or liquidated could get their licenses scrapped in Nepal too.

According to experts, the arrival of foreign banks to do wholesale banking could well stimulate Nepali banks to invest in major projects.

Technology as well as knowledge transfer can be yet another advantage the Nepali banking system can get with the entry of foreign banks, they argue.

Nabil marks silver jubilee

Nabil marks silver jubilee
ekantipu, 29-Aug-09

Nabil Bank, Nepal's first private sector joint venture bank, celebrated its silver jubilee on Friday.

Since it began its operations in 1984, the bank has taken great strides in building partnerships for progress with all stakholders.

Its net worth grew to Rs.3.46 billion in 2009 from just s. 78 million in 1989 after five years of its operation. Its non-performing loans (NPL) also went down to 0.80 percent from 3.40 percent in 1989. Its NPL had however reached as high as 11.20 percent in 1999.

The bank has said that its deposits went up to Rs. 37.34 billion in 2009 from Rs. 779 million in 1989. On other hand, the shareholders also greatly benefited over the period.

Chief Executive Officer of Nabil Anil Shah said that the Nabil had become the model of stability, strength and progress in the banking sector.

The bank also declared that it would diversify in merchant banking, brokerage, insurance, frastructure and micro-lending within the next five years.

Related Links
Company of the Month: Nabil Bank
Nabil Bank

Banks collect 22 percent more deposit in Q1

Banks collect 22 percent more deposit in Q1
ArthaExpress, 28-Nov-08

Nepali commercial banks collected 22 percent more deposit during the first quarter (Q1) of the current fiscal year than they did in the corresponding period last year, according to the unedited financial date released by Nepal Rastra Bank (NRB), the central bank of the country.

The 25 commercial banks in Nepal collected Rs. 450 billion in deposits during the period against the Rs. 351 billion collected during the corresponding period last year. There were only 23 commercial banks during the first quarter of Fiscal Year 2007/08.

The deposit figures for the first quarter of Fiscal Year 2008/09 also included Rs. 37.59 billion in foreign currency and the remaining in domestic currency.

According to NRB, Rastriya Banijya Bank (RBB), the largest bank of the

country, collected the most deposits in the period followed by Nepal Bank Ltd. (NBL). RBB collected Rs. 56.7 billion while NBL collected Rs. 40 billion during the first quarter of this year.

Likewise, collective loans and advances of the commercial banks increased by 25.5 percent during the first quarter of the current fiscal year.

The 25 commercial banks provided loans and advances amounting Rs. 321 billion against Rs. 239 billion provided by the 23 banks in last fiscal year´s first quarter.

Nepal Investment Bank Ltd. was the largest provider of loans and advances during the period with Rs. 31.5 billion followed by Agriculture Development Bank, Nepal (ADBN) with Rs. 31.1 billion, the NRB report said.

Despite being the two largest banks of the country, RBB and NBL didn´t provide the biggest amount of loans and advances as they were tied down by their negative net-worth. The central bank has fixed limitation on loans for banks with negative net-worth.

In the meantime, commercial banks collectively earned a net profit of Rs. 2.59 billion during the period against Rs. 1.91 billion last year. Among the 25 banks, RBB declared the highest net profit amounting Rs. 374 million, followed by Standard Chartered Bank Nepal Ltd (SCBNL) with Rs. 249 billion.

Real Estate Rate May Cause Banking to Abate, Warns IMF

Real Estate Rate May Cause Banking to Abate, Warns IMF
ArthaExpress, 24-Nov-08

Nepal is over-banked and agressive lending as well as large exposure of the financial sector to real estate could harm the financial health of the country, warned a visiting International Monetary Fund (IMF) team.

"With some 160 licenced deposit-taking institutions, Nepal is over-banked," said Braian J Aitken, Deputy Division Chief of Asia and Pacific department of IMF.

"Aggressive lending practices of many of the financial institutions expose their depositors to excessive risk. This underscores the urgency of significantly ramping up Nepal Rastra Bank´s (NRB) regulatory enforcement," IMF team leader Aitken said adding that the central bank might find it difficult to supervise the increasing number of financial institutions. "Thus, the central bank´s supervisory capacity has to be increased," he added.
IMF has also shown serious concern over the rapidly growing real estate price. "The biggest short-run concern is rapidly growing real estate price. Given the large exposure of the financial sector to real estate, a decline in real estate prices would have negative effects on banks and ultimately on output growth," said the IMF team.

The IMF blames the loose monetary policy for this development in the real estate market. "Development in the real estate market has been fuelled in part by a loose monetary policy," IMF said. "However, NRB recognises the risks and has recently taken some modest steps to tighten monetary policy but more tightening may be needed."

The central bank has announced a cautious Monetary Policy - that was a regular Seventh Policy - for the fiscal year 2008-09 on September 29. NRB has claimed that it has brought a rigid Monetary Policy that has increased the cash reserve ratio (CRR) by half a percentage point to 5.5 per cent. The CRR has been five per cent since 2004.

The IMF team´s visit is focused on the recently approved budget and current financial and macro-economic conditions. The team held marathon discussions with Finance Minister Dr Baburam Bhattarai, finance ministry officials and the acting governor of the central bank over the last two weeks. "Nepal´s macro-economic situation is good but subject to risks. Its outlook broadly remains stable, but the average inflation could increase to around 11 per cent," according to IMF.

This year´s Monetary Policy has also been designed largely to maintain macro-economic stability and price rise control. But it has not been able to crack the whip on rising inflation. "Inflation in Nepal is largely catalysed by conditions in India," said Aitken, adding that Nepal´s inflation could well be called imported.

The IMF also termed the recently approved budget as ambitious. "Revenue is budgeted to increase by 1.75 per cent of the GDP in part based on improved tax administration," the IMF team said. "Higher revenue forecast accomodates a sizable rise in budgeted recurrent spending. The government has taken impressive steps in an effort to achieve its revenue target. Revenue remains buoyant at this stage, but there is still the risk that if planned revenue fails to materialise the sustainability of the budget could be threatened," summed the IMF team that visits Nepal twice a year to access the country´s fiscal and monetary policies.

Rough road ahead for banks

Rough road ahead for banks
ArthaExpress, 2-Nov-08

Fierce competition is likely to erupt in Nepal’s banking sector. At a time when the market pie has not increased and over four dozen industries are lying closed across the country, the rise in number of financial institutions is leading to cut-throat competition in the domestic banking sector.

Apart from over a half dozen financial institutions — including B-class development banks and C-class finance companies — the entry of two ‘big’ A-class commercial banks will not only swell the number to 27 but also force them to look for new investment avenues.

The proposed Peoples’ Bank Nepal Ltd — the 26th commercial bank — got the green signal on September 25. Mero Bank Ltd — the 27th commercial bank — also recently got permission from Nepal Rastra Bank to operate after it deposited five per cent of its paid up capital with the central bank.

“Right after we get the operating licence, we’ll start operations,” said Dr Duman Thapa, coordinator of Mero Bank Ltd.

With an authorised capital of Rs 4 billion and paid up capital of Rs 2.45 billion, the proposed Mero Bank Ltd has a total of 1,328 promoters.

“The promoters have 70 per cent share — Rs 1.71 billion — and the rest 30 per cent share — Rs 730 million — will be floated among the public within one year of the bank beginning operations,” Thapa added.

The bank that consists of five groups of promoters has industrialists, businessmen, social workers, Non-Resident Nepalis (NRNs), economists, diplomats, private school promoters, professors, doctors, lawyers, engineers and tourism entrepreneurs.

A 13-member coordinating committee has been formed, with Dr Thapa as coordinator and Dr Govinda Nepal, Bhoj Bahadur Shah, Muktiram Pandey, Gopal Khadka, Gopal Khanal, Rameshwor Sapkota, Indra Bahadur Malla, Bijay Sambahamphe, Madan Acharya, Ishwor Gurung, Parmeshwor Panta, Sabhu Bikram Thapa and Tulsi Pokhrel as members.

Prof Dr Madan Kumar Dahal is chairman of the proposed bank that has - for the first time in the banking history of Nepal - an advisory council headed by former minister and diplomat Dr Bhesh Bahadur Thapa as its chairman.

People’s Bank Nepal Ltd has a paid up capital of Rs 2 billion. “It is the first bank having Rs 2 billion paid up capital after the central bank increased the paid up capital limit for commercial banks,” according to the bank.

The bank, with 898 promoters, has Guru Prasad Neupane as its chairman while Sailendra Guragain, Keshav Bahadur Rayamajhi, Dharmadhoj Parajuli, Nirmaljyoti Tuladhar and Chiranjeevi Dwa are its promoters.

The bank is expected to come into operation by the second week of next April.

Licensed Commercial Banks
• Nepal Bank Ltd (November 15, 1937)
• Rastriya Banijya Bank (January 23, 1966)
• Nabil Bank Ltd (July 16, 1984)
• Nepal Investment Bank Ltd (February 27, 1986)
• Standard Chartered Bank Nepal Ltd (January 24, 1986)
• Himalayan Bank Ltd (January 18, 1993)
• Nepal SBI Bank Ltd (July 7, 1993)
• Nepal Bangladesh Bank Ltd
• Everest Bank Ltd (October 18, 1994)
• Bank of Kathmandu Ltd (March 3, 1995)
• Nepal Credit and Commerce Bank (October 14, 1996)
• Lumbini Bank Ltd (July 17, 1998)
• NIC Bank Ltd (July 21, 1998)
• Kumari Bank Ltd (April 3, 2001)
• Machhapuchhre Bank Ltd (October 3, 2000)
• Laxmi Bank Ltd (April 3, 2002)
• Siddhartha Bank Ltd (December 24, 2002)
• Agriculture Development Bank Ltd
• Global Bank Ltd (January 2, 2007)
• Citizens’ International Bank Ltd (April 20, 2007)
• Prime Commercial Bank (September 24, 2007)
• Bank of Asia Nepal Ltd (October 12, 2007)
• Sunrise Bank Ltd (October 12, 2007)
• Development Credit Bank Ltd (Upgraded in 2007)
• NMB Bank Ltd (Established in 1996/Upgraded in 2007)

NRB tightens minimum reserve rules for banks

NRB tightens minimum reserve rules for banks
eKantipur, 22-Oct-08

In a bid to get sufficient capital reserves in registered banks and financial institutions and to ensure financial stability, Nepal Rastra Bank, the central bank, has enforced Prompt Corrective Action (PCA) with effect from Oct. 17.

NRB said in a statement Wednesday that any bank or financial institution under category 'A', 'B' or 'C' will immediately be punished as per the existing law if it is not found to be maintaining the capital adequacy ratio fixed by the regulator.

The central bank said it will prevent the concerned banks and financial institutions from declaring dividends and bonus shares if their minimum capital ratios are found to be up to two percentage points less than the required ratio.

Similarly if the capital reserves are found to be between 2 and 4 percentage points less than the specified limit, the central bank would impose a cap on the amount of loans to be issued by those banks and financial institutions.

For those banks and financial institutions whose minimum capital adequacy ratios are less by 4 to 6 percentage points than the level fixed by the regulator, then they will be restricted from opening new deposit accounts and issuing additional loans, NRB said.

Similarly, NRB can bar the concerned banks and financial institutions from increasing salaries and benefits of employees, recruiting additional workforce as well as promoting staff in case the capital reserves maintained by them are found to be 6 to 8 percentage points less than the minimum capital reserve ratio.

Under the new action, NRB will declare banks and financial institutions troubled, if their capital reserve is found to be 8 percentage points or more, less than the capital reserve ratio fixed by NRB.

The central bank will initiate the process of revoking licenses and liquidation of those banks and financial institutions if they fail to increase the capital reserves to the required level within six month of the date they were declared troubled, said the central bank.

Five financial institutions merge to become commercial bank

Five financial institutions merge to become commercial bank
ArthaExpress, 29-Apr-08

Five financial institutions — Mahalaxmi Finance Ltd, Birgunj Finance Ltd, Siddhartha Finance Ltd, Butawal Finance Ltd and Himchuli Development Bank — have signed an accord yesterday to merge and upgrade to ‘A’ level commercial bank.

“All the financial institutions are planning to increase their paid up capital to Rs 400 million each to make Rs 2 billion in total required for the upgradation for the commercial banks,” said Ramesh Kumar Bhattarai, coordinator of the Merger committee.

The proposed ‘United Bank of Nepal’ after the merger, will have head office in Kathmandu, according to the Memorandum of Understanding (MoU).

However, the companies that have currently Rs 50 million to 100 million paid up capital have to increase to Rs 400 million each to make a total of Rs 2 billion required for a commercial bank. “We will hold special AGM and propose 1:4 rights shares,” informed Bhatta-rai, without clarifying what will happen if they cannot raise paid up capital to almost four to eight times.

Mahalaxmi Finance, National Finance and Narayani Finance have earlier declared a merger for upgradation to a Development bank. However, the plan didnot work.

Company of the Month: Nabil Bank

Company of the Month: Nabil Bank
Nabil goes rural
It’s not just profits that is driving Nepal’s first joint venture bank to venture out to the villages
NepaliTimes, Issue #384 (25-Jan-08 to 31-Jan-08)

When Nabil Bank opened in 1984, it was the first foreign joint venture in Nepal’s banking sector and enjoyed first player advantage. But it didn’t last. Soon, there were other multinationals: Grindlays and Indosuez overtook Nabil.

Nabil had transformed the way banking was done, providing a breath of fresh air for those used to the shoddy and indifferent service at the public sector banks. But by the 1990s there were others who offered the same service.

Nabil didn’t exactly go into decline, but it seemed to have lost direction. That was when the board decided to make some course corrections and one part of that effort was to induct management talent from India. Then, three years ago, it brought in Anil Shah, the man who pioneered consumer banking at Standard Chartered. It turned out to be the right decision at the right time.

Shah has gone about systematically re-inventing the Nabil brand, overhauling everything from the mission statement to giving the bank a new strategic direction in rural banking.

“We didn’t want to be an also-ran,” Shah said in an interview this week after Nabil was selected as the Nepali Times Company of the Month for January. “We brainstormed about what we wanted to be and everyone agreed we had to be Nepal’s bank of first choice.”

Indeed, ‘Nepal’s Bank of 1st Choice’ has now become Nabil’s slogan and was the product of an exercise to draft a new mission statement that involved the entire staff.

”Everyone participated in the process, so it is a vision that we all own. Our mission statement is not a destination, it is a journey,” says Shah listing the bank’s stakeholders: customers, shareholders, regulators, the community and staffers.

Besides being profitable and efficient, Nabil wants to be a model for transparency among Nepali banks and has tried to go beyond tokenism in its corporate social responsibility credo by sponsoring female literacy programs and a glaucoma initiative at Tilganga Hospital. Staffers, who call themselves ‘Nabilians’, say there is a greater sense of team spirit in company in the past three years and there is a realization that their company has a goal beyond day-to-day banking to contribute to the nation’s economy and to serve the community.

Some of Shah’s acronyms seem to come straight out of the formula of management gurus. For example, for staffers he has simplified corporate goals into CRISP where C is for ‘corporate focussed’, R is for ‘result oriented’, I is for ‘innovations’, S for ‘synergy’ and P for ‘professional’. The team-building is showing dramatic results in the bottom line. Nabil shares have soared from Rs 815 in 2005 to Rs 4400 today. Net profits are up by 48 percent.

Nabil’s management has tried to find the middle ground between the efficiency of a multinational joint venture and a Nepali bank. This hybrid formula, they hope, will position the bank to adjust to the post-2010 era from when foreign banks will be allowed in without restrictions according to a WTO membership timetable. Nabil has taken a strategic decision to target rural customers. Among the reasons is a crowded urban market, the injection of remittance money into the countryside, and the fact that the default rate is virtually zero in the districts.

Two months ago, the bank launched the first phase of its rural banking drive by opening a dozen new semi-urban branches in the districts. By next year, Nabil will have 30 branches in even more remote areas. “Of Nepal’s 27 million people 20 million live in rural areas, you can’t be a national bank by ignoring that,” says Shah, who admits he got the inspiration from Maoist leader Pushpa Kamal Dahal who was asked by journalists after joining the peace process if he’d ever go back to the jungle. “We were never in the jungle, we were in the real Nepal,” Dahal had said.

Shah says it is not enough in a country like Nepal for banks to be profitable and pay taxes. “There is a higher calling, we have to ask ourselves, are we helping make a difference. And the way we do that is by taking financial services to rural areas and make that a catalyst for economic growth and employment generation,” says Shah. “In 1984, Nabil brought international banking to Kathmandu. In 2007 we took banking to rural Nepal.”

Banks raise loan rates, Deposit rates go up too

Banks raise loan rates, Deposit rates go up too
eKantipur.com, 12-Feb-08
Krishna Regmi

The days of cheaper auto, housing, personal and other loans are, sadly, over.
Those who are planning to borrow and who have already borrowed must stand ready to fork out more money and readjust their financial planning.

The average lending rate in the banking sector has edged up by 1 to 2 percent, while interest rates on fixed deposits have gone up by 1 to 3 percent, said Radhesh Pant, president of Nepal Bankers' Association.

Nabil Bank has already raised the lending rate in consumer financing to 8 percent, up from 6.5 percent.

Anil Shah, chief executive officer at Nabil said, "To collect savings to match the rising demand for money, we have begun offering 6.5 to 7 percent interest rates on fixed deposits of six months and above."

It was 3 to 3.5 percent earlier. While the bank has revised fixed deposit rates upward, Shah said it will increase rates in other types of deposits gradually.

Borrowers have begun to feel the pinch. Sashi Tulachan, a resident of Tikhediwal, was arranging money to pay the first installment on an auto loan when she was notified that her installment has risen because of recent upward movement in the lending rate.

"To my surprise and dismay, I received a document from Nabil Bank, asking me to sign a new contractual agreement which raises my lending rate to 7.5 percent," she said. "I had just recently bought a vehicle with loan at 6 percent interest."

She said she felt unhappy, but signed the agreement as she did not have any other option. "Working people like me have to prepare financial planning in advance. Any abrupt change will impact my budget," she said.

The revision in interest rates is due to the growing liquidity crunch in the banking sector. Discount rate on 91-day treasury bills (T-bills) reached 6.16 percent at Monday's auction. It was just 2 percent last September. Another strong indicator of stretched liquidity is the rising inter-bank lending rate, which is hovering over 8 percent, up from 3.5 percent in mid-July.

Pant said the liquidity shortage will accelerate as Nepal Telecom and Nepal Electricity are issuing shares and bonds while Nepal Oil Corporation is also in the process of doing likewise, to raise over 14 billion rupees. "The days for cheap loans are certainly over," he said.

Sensing that a liquidity crisis may creep in, he said NBA has written to the central bank to take necessary measures to inject more funds into the banking system.

Nepal Rastra Bank has already injected over five billion rupees into the system in the past one month to stave off the liquidity crisis. On the impact of the economy, Pant said the rising interest rate would discourage capital flight.

"Likewise, it would encourage savings, which could be channelled toward productive investment," he said.

Nepal to host micro-finance world summit in February

Nepal to host micro-finance world summit in February
Xinhua, 5-Jan-08

Nepal is set to host a world summit on micro-finance next month as the country continues its long battle to expand and consolidate the service delivery institutions, The Himalayan Times reported on Saturday.

According to the daily, the three-day conference, the first of its kind and themed Reaching the Poorest of the Poor for Sustainable Income, kicks off in Kathmandu on February 14.

The summit is intended to facilitate a broad dialogue and create a common understanding among the stakeholders, including policymakers and politicians to make micro-finance a priority issue in the national development strategy, according to the organizers.

Some 300 participants -- policy makers, practitioners, rural development, micro-finance development and commercial banks, and cooperatives and representatives from non-governmental organizations from around the world are expected to attend the summit, organizers said.

The stakeholders will discuss their experiences and jointly decide on the future of micro-finance in Nepal, they said.

Nepal has over 3,600 micro-finance institutions providing services to roughly 2.29 million of the rural population -- which is 8.8 percent of the total population and 26.1 percent of those living below the poverty line.

Of them, little over 1.23 million are women, representing 9.73 of the country's total female population.

This means, according to experts, Nepal has an ambitious target of reaching out to close to 12 million or over 31 percent of the population living below and slightly above the poverty line.

Central bank declares NDB troubled bank

Central bank declares NDB troubled bank
eKantipur.com, 10-Oct-07
BY KRISHNA REGMI

Nepal Rastra Bank (NRB) Wednesday declared Nepal Development Bank (NDB) as a troubled bank and decided to intervene into its operation to protect depositors' interest and salvage it.

The central bank's move bars the Development Bank from issuing loans and advances, and freezes its asset transactions, said a highly-placed source at the NRB.

Even as such declaration normally does not allow the bank from mobilizing deposits, the bank would still be able to collect deposits owing to a sub judice case at the court.

"The NRB board of directors meeting today took the decision to safeguard further erosion of Development Bank's financial health," said the source. The central bank took the decision after the bank's resistance to NRB's past reform initiatives sharply eroded its financial health.

NRB had been closely scrutinizing the bank's activities after its report for fiscal year 2005/06 revealed that the bank's capital fund was in the negative by Rs 218 million. And, its per share value was negative by Rs 148. Of the total investment of Rs 623 million the bank made till then, around 85 million rupees was in non-performing loans.

The central bank issued various directives to the bank and even imposed a restriction for deposit mobilization. However, the bank produced a stay order on those decisions. In May, NRB had directed the bank to remove its Chairman, Uttam Pun, but the bank refused to comply.

Despite the problems, the bank had launched a deposit scheme, offering high interest rates up to eight percent to lure customers. The bank presently has around Rs 1.5 billion in deposit, including Rs 650 million from Nepal Provident Fund and Rs 450 million from Nepal Army.

The government has already asked the public sector institutions to withdraw their deposits after maturity from all banks having negative net worth.

This will compel both the depositors to take out their deposits from this troubled bank, thus steeply reducing its deposit base.

Kumari Bank extends service in the UK

Kumari Bank extends service in the UK
Nepalnews.com, 4-Oct-07

A Nepali bank has announced extension of its banking services to cover Nepalese community living in the United Kingdom.

Kumari Bank has signed up with Samsara Nepal Financial Services, UK, a registered Money Transmitter company in the UK and Samsara Pvt. Ltd., Nepal authorised by Nepal Rastra Bank to conduct remittance services to facilitate banking services to the Nepalese community residing in the United Kingdom.

"To this effect Samsara UK will be an access point for Nepalese people to open accounts with Kumari Bank, make deposits, transfer money to more than 195 locations within Nepal, arrange credit facilities, manage account online and many more services," states a press release by the Bank.

On October 2, 2007 Noor Pratap J.B. Rana, Chairman of Kumari Bank officially launched the service at Holiday Inn, Kensington, London amidst two hundred distinguished guests who were specially invited for the function. Speaking on the occasion Rana said, "Globalisation has made the world smaller because of which Kumari Bank has been able to provide its services to the Nepalese community residing in the UK. I believe that you will place your trust in us and avail our services and consequently help us develop our services. We are here not only to provide remittance services but all other banking services that are possible"

At the function, Chief Executive Officer Surender Bhandari introduced Kumari Bank and explained how the service will work. "For a long time people who were working abroad wanted an easy and reliable source to send back their earnings to their beloved ones in Nepal. Keeping this in mind Kumari Bank in collaboration with Samsara Group has started not only remittance services but all other banking services that are required," he said.

Director of Samsara UK, Raja Ram Giri said the partnership with Kumari Bank has opened the doors for smooth, reliable and efficient direct banking facilities not only to the Nepalese community but also to British nationals who visit Nepal in thousands every year, now they can also avail these benefits from our service.

"We will be providing customer single package with a cost of £4.99 a month which gives customer access to all the facilities that Kumari Bank provides; transfer money as many times as you want to any counter of Kumari Bank and Samsara without paying any commission; deliver cheque books, visa electron card direct to your address in UK and many more," Giri added.

Acting ambassador of the Nepalese Embassy in UK Jhabindra Prasad Aryal who was chief guest at the function said, "This is definitely a beginning of a new chapter in the Nepalese banking sector, Kumari Bank in association with Samsara Group coming to UK to provide direct banking service to the Nepalese community, I must say, is a commendable job and I wish them all success." nepalnews.com Oct 04 07

Interview - Siddhant Pandey (CEO, Ace Development Bank)

Interview - Siddhant Pandey (CEO, Ace Development Bank)
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.

Are commercial banks parasitic?

Are commercial banks parasitic?
New Business Age, September 2007
By Bipin Hada

Lower interest rate on Trust Receipt Loan is subsidizing big corporates by exploiting the poor workers who send in remittance.

As the name suggests, commercial bank’s major component of business comprises of commercial activities. Significant portion of the business comes in the form of trade finance. Some of the credit products extended for financing working capital need are overdraft, demand loan, cash credit, hypothecation loan etc. These credit products are the sources of financing stock and receivables of most business enterprises, especially bigger ones.

In an import based country like Nepal, the most popular credit product being offered by banks to finance working capital needs of business enterprises is the Trust Receipt Loan. Trust Receipt Loan is provided against endorsement of title documents (Bill of Lading) of consignment of imported goods by the import letter-of-credit issuing bank. Against this endorsement, the applicant of import letter of credit will be eligible to take possession of imported goods in transit on behalf of the bank from the shipping liner/ transporter.

Technically, Trust Receipt Loan should be extended for a transit period of imported goods during which it is off-loaded by shipping liner at the port of entry and moved to the final destination to the importer’s country. Going by the same line, in case of Nepali import business, this should not be more than 15 days duration considering the port of entry as Kolkata and Kathmandu as the final destination. Once the possession of goods is taken over by the importer (import LC applicant) and the goods reach the godown of the applicant, the technical validity of ‘Trust Receipt Loan’ ceases to exist and the imported goods simply become stock in hand of the borrower. All such stocks in possession of borrowers with proper title are to be generally financed by other credit products like overdraft, demand loan, cash credit, hypothecation loan etc. Is this the case in Nepal? Going by the evidences, the answer is quite obvious.

In Nepal, almost all commercial banks are extending Trust Receipt Loan for a period up to 180 days to importers, both manufacturing as well as trading enterprises. This tenure is very much comparable with the loan tenure of demand loan/ working capital loan provided to industrialist and trader to hold stock considering the average trade cycle of most of the industrial raw materials and trading goods. The time period of 180 days is very much more than enough compared to the general trade cycle comprising of ‘import, stock, sales, receivables and recovery of receivables’ of any industrial or trading enterprises. Industrial as well as trading enterprises are utilizing Trust Receipt Loan for longer period as far as possible due to lower cost tag attached to this loan product.

Almost all commercial banks are extending Trust Receipt Loan at an interest rate as low as 6.00 percent per annum for tenure up to 180 days. However, the appropriate credit products to finance stock and receivables are overdraft, demand loan, cash credit, hypothecation loan which are tagged with an interest rate of around 8.00 to 10.00 percent per annum. Due to this low cost of Trust Receipt Loan, borrowers are diverting this source of short term financing to finance long term capital expenditures. This technical mismatch leads to situation where borrowers more often request bank for time extension of Trust Receipt Loan deal even after the lapse of 180 days. In a way, this has led to erosion in financial discipline of the borrowers. Banks have been lenient on this issue mainly because of fear of losing business in the ever-increasing competitive market and borrowers have been enjoying a free-ride capitalizing on commercial banks’ fear factor.

It is a universal assumption that the interest rates quoted against loans and advances should equal to the sum total of cost of fund, risk premium and profit margin. Cost of fund depends on the sources of fund, while the tenure and risk premium primarily depends on security arrangements whereas profit margin depends on profit goal of the service provider and of course, the market scenario. In the present context, the main source of funds of a commercial bank is saving deposit where cost of fund is somewhat lower than real rate of inflation. The tenure of saving deposit and working capital financing are convincingly comparable as saving deposit is considered to be stable source of fund and the above referred working capital financing are extended for period less than one year. Regarding risk premium, security arrangement available for Trust Receipt Loan as well as other working capital loan products are the same, i.e. hypothecation of stocks with insurance coverage in almost all cases except for some small borrowers. Regarding profit margin, this will not be a differentiating factor among commercial banks in the context of present competitive market scenario. Therefore, there is no obvious difference between Trust Receipt Loan and other credit products to properly justify the disparity in interest rate.

The main reason for this disparity in interest rate between Trust Receipt Loan and other working capital loans is the other incomes that can be earned by trade finance activities. The foreign exchange income from import letter of credit business is a good attraction. Import letter of credit business mainly generates revenue in the form of letter of credit issuance commission and foreign exchange gain. A straightforward estimation implies that around 80 percent of revenue from import letter of credit business is from foreign exchange gain. In the prevailing Nepali banking market, letter of credit issuance commission is around 0.10 percent of letter of credit value whereas foreign exchange gain is around Rs. 0.30 per USD, which is about half of the difference between the buying rate and selling rate of Foreign Exchange. At this rate, letter of credit issuance commission and foreign exchange gain per USD 100 value of import letter of credit will be Rs. 6.55 and Rs. 30.00 respectively at the exchange rate of Rs. 65.50 per USD. In order to take maximum benefit out of the foreign exchange gain, commercial banks are trying to get more and more import business by offering lower interest rate on trade financing. This effort has been reflected as leverage shown by banks in Trust Receipt Loan by allowing lowest interest rate compared to other credit products available to finance stocks and receivables. The question that immediately comes to mind is how do we explain this leeway provided by commercial banks?

One of the main sources of the country’s foreign exchange is inflow remittance coming from the Nepali workers working in foreign countries. The import business is primarily being supported by these remittances. Commercial banks are capitalizing on the almost a fixed margin, i.e. difference between foreign exchange buying and selling rates. Banks are doing this in order to achieve their goal of profit maximization. Looking at this from the consumers’ perspective, commercial banks are reaping substantial returns by subsidizing a loan product that primarily goes to big corporate houses at the cost of individuals selling/ surrendering their hard earned foreign exchange. This is not at all a fair treatment.

To mitigate this, the difference between the foreign exchange buying and selling rate has to be rationalized and interest rate applicable to each loan type has to be rationalized on the basis of facility’s nature, risk, tenure and security arrangement.

Capital flight hits Nepali banks

Capital flight hits Nepali banks
ArthaExpress, 24-Sep-2007

A large chunk of capital has been draining out because of low interest rate of Nepali banks in comparison to Indian banks.

Banking and financial experts have suggested an investment-friendly environment and industrial security to stop capital flight from Nepal. “There is a huge demand for capital in India because of investment-friendly environment,” said Bijaya Kumar Sarawagi, chairman of Birgunj Finance Ltd, adding that India has also increased interest rates in deposit and in loan.

Nepali commercial banks offer three to five per cent interest rates and finance companies offer six to eight per cent, whereas Indian banks in bordering areas offer nine to 12 per cent interest rates.

Nepali banks charge six to nine per cent and finance companies charge nine to 12 per cent interest on loans, whereas Indian banks charge 13 to 15 per cent. “”If the government does not bring any effective policy, capital will continue to go to India,” said Ganesh Lath, president of BCCI.

Last year, the capital flight to India has been calculated at around Rs 500 million from Birgunj only.

“Even after restoration of loktantra, there is no stability as insecurity, attacks, bandhs, strikes, threats, kidnappings, extortions and ransoms has been continuing,” he blamed the government.