The first quarter results are out and it seems the bank is doing well. But deposit growth rate has been nominal.
Deposit expansion is not a priority area for us at the moment. If you analyze the figures of the banking industry, you will see most of the banks posted higher net interest income mainly because of reduction in expenditure on deposit cost. We also shed high-cost deposits (especially fixed deposits) as there is not much demand for loans these days, albeit our credit portfolio also expanded marginally, which helped us in boosting profit.
Lately, the bank has been promoting its home loan business aggressively. Are there new products in the pipeline?
When home loans were a big no-no for most of the banks a year ago, we launched a scheme, called Sayapatri Griha Awas Yojana. At that time public response was huge and home loans worth Rs 1.5 billion were issued. Although more players are in the home loan market at present, we have come up with another home loan scheme with both floating and fixed interest rate options.
But the tenure for these home loan schemes usually span 15 years in most cases. Can´t banks issue longer term loans with payback period of say 30 years?
Actually that should be the case. But we should not forget the fact that Nepalis do not have long-term saving habit. We are currently raising funds (deposits) with a maturity period of 1-2 years, whereas loans for projects like hydropower are issued for 15 to 17 years. So we don´t have matching liability (deposit collection) to cater to the demand for longer term housing loans.
So deposits of long-term maturity are necessary for availability of home loans with long term payback period?
Yes, common man should be made aware of long-term savings habit. Another equally important aspect is giving a boost to small and micro industries. This will help in capital formation process. For example, if you help a farmer to grow his business through affordable loans the products that he grows can be processed in industries to generate other products. This will not only aid the farmer but lower our reliance on imports, which is impeding capital formation process. A consumption-led economy, dominated by the trading sector which relies on imports, will not help the country.
You just gave an example of a farmer and the central bank recently made it mandatory for all banks to extend certain portion of loans to the agriculture sector. But banks are not showing keen interest in extending loans to farmers.
Let´s be frank about it. Lending to farmers is remunerative as they do not bargain much on interest rates like borrowers of other sectors. It is also safe to lend to stand-alone farmers as they pledge land holding as security. And the biggest advantage is that farmers live in a very small society and are terribly afraid of loan defaults, so recovery rate is also good. So the mindset of bankers has to change.
But this is not happening, isn´t it?
Things are happening but they are moving ahead at a painfully slow pace. To encourage banks to move into the sector, the government should make infrastructure available, including provisions for better supply chain management. The government should also come up with insurance schemes, which is not available in Nepal.
Well the government is mulling over introducing subsidized insurance schemes for crops, livestock and poultry. But again crops insurance is a loss making business in India as well.
We should not be talking about profits and losses at the moment. The government should view this as its social responsibility. For example, if you tell a farmer to buy an insurance policy, the cost will eventually be passed on to consumers, meaning food prices will rise. But if you give some incentive to farmers, the entire society can reap benefits. So the government should play the role of a catalyst.
Let´s change the topic and talk about mandatory provision on base lending rate introduced by the central bank. How do you think it will affect the lending market?
It may not have immediate visible impact, but it will definitely bring transparency on how banks charge interest rates. This system will also trigger competition and create pressure on banks to reduce their operating cost. So it will be beneficial to borrowers.
So can we expect further reduction on deposit rates as banks will now have to reduce cost of fund to bring down their base rates?
If you see it in isolation then it should. But why are you presuming that the central bank will sit quietly after introducing base rate. Other actions will follow.
Like what?
Maybe the central bank will say banks cannot lend below the base rate or introduce a margin allowing banks to extend loans at certain percentage points below the base rate. It may also ask banks to narrow their interest spread (the difference between lending and deposit rates). If such provision comes into effect, banks will have to revisit their entire investment portfolio.
Lastly, what are your future plans?
We are planning to go aggressively into agriculture and consumer lending. We are exploring the possibilities of tying up with big trading houses to finance consumer electronic goods. We are planning to introduce education loans as well.
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