The good news for borrowers is that banks have already started dropping their lending rates in spite of the requirement to maintain higher liquidity. As I mentioned in a previous column, competition amongst banks in Nepal is stiff enough, and market forces work very well when it comes to lending rates.[break]
But the issue really is not how high the mandatory credit deposit ratio of 80% is; it is how profitably the balance of 20% can be deployed. Right now, options available are limited and banks earn less than 1% p.a. on these funds.
Banks need to price their loans in such a way that 80 Rupees of loan they disburse yields them sufficient returns to cover interest on 100 Rupees of deposit plus overheads plus risk premium plus profit for shareholders. And I can tell you, banks are currently not in a position to cover all of the above. This is evident from the falling net interest income and rising loan loss provision being reported by almost all banks.
Should banks be allowed to operate at tighter liquidity margins? Maybe not. If you recall, increased liquidity requirement was made mandatory following our experiences with liquidity stress not so long ago. But the authorities can certainly consider issuing higher yielding government bonds so that a bank’s weighted average return improves.
In the current scenario, the government is the sole beneficiary of ridiculously cheap funds it gets to access from banks through treasury bills. And most of this money is lying idle in the government coffers! It will also help if the government expedites spending on infrastructure projects and other productive areas with a view to improving business conditions. At the end of the day, the government must play a key role in leading economic growth.
What is the crux of the IC misappropriation scam? Why are banks being drawn into it? Are they involved?
A number of business firms made numerous Indian Rupee denominated payments to beneficiaries in India through bank drafts. Applicants are required to submit documents evidencing underlying transactions, e.g., invoice, customs paper, transport documents as applicable – which they did.
These transactions were business as usual for banks until authorities discovered that the customs papers submitted to banks by the applicants were fake. So the case really is about a bunch of dishonest people exchanging Nepali Rupees for Indian currency through a number of bank branches by producing fake documents. The authorities have been investigating this scam for six months now.
A few people associated with the firms perpetuating the frauds have reportedly been apprehended and a number of bank officials have been asked to explain to determine whether there has been any collusion.
Banks have rightly maintained that there has been no collusion. Issuance of Indian currency draft is one of the basic services banks provide. With increasing number of bank branches, this service is readily and easily available for trade transactions.
In fact, banks are the victims of this scam rather than anything else. Banks deal in documents, and transactions are done in good faith. International laws governing trade transactions clearly stipulate that banks are not responsible to determine the genuineness of a document presented to them. General common sense approach is adopted, though. But hindsight is 20/20, as they say.
The other aspect of this scam which hasn’t been paid too much attention to, it appears, is the fact that these drafts were made payable through bank accounts in India. Investigating authorities can dig deeper with the help of Indian banks who are in a position to provide the details of beneficiaries in India.
What’s also worrisome is that government authorities do not accept shortcomings in their system. Even today, there is no mechanism or notification based on which banks can differentiate a fake customs document from a genuine one.
The lesson learnt from this episode is that banks need to constantly be on their toes as criminals always try to stay a step ahead. Recent and ongoing debates, globally and nationwide, on KYC and anti-money laundering drive, is in the backdrop of such incidents.
How viable is agriculture in terms of investment for banks? Do you suppose the market is mature enough to warrant big investments, moving away from small aground farmers?
I believe the agriculture sector needs to evolve further before banks can build a sizeable portfolio here. Improvements are necessary on issues ranging from crop insurance, labor management challenges, land pooling, storage and transport infrastructure, etc. You may argue that it’s a bit of a chicken and egg: how will many of these issues be addressed without investment? You are right. But commercial banks have limited risk appetite as they need to eventually pay off their depositors. So these investments are best done through development or government agencies.
Nonetheless, there are numerous examples of banks having loaned to agri businesses. Unfortunately, there are very few success stories – mostly due to the issues discussed above. A large floriculture venture comes to my mind as an example. Some 10 years on, this exposure is an NPA for lending institutions.
In the midst of all these challenges, I believe we are gradually moving to a scenario where commercial farming is beginning to look more feasible than before, the primary drivers being demand, low entry/exit barriers, and availability of money.
Banks are not averse to entering this space, even if the risk is relatively higher, partly due to regulatory direction and also due to the fact that there aren’t too many investment avenues. It’s true the market isn’t mature enough and risks arising from continued political chaos are still huge.
However, if the authorities were able to walk the talk with respect to promoting agriculture, I believe the private sector will not shy away from making further investments here.
Joshi is the CEO of Laxmi Bank
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