“Merger and acquisition is one of our core strategies”

ShareSansar, March 2:

Prabhu Group is on a roller coaster ride since the past few years. After tasting success in the finance and money transfer business, the group has made some jaw-dropping leaps in the banking sector.

Riding the wave of success is no other than Prabhu Bank's Chief Executive Officer Ashok Serchan, the man who oversaw the transformation of the group's business, from a finance company and money transfer to a development bank and, finally, an A-class commercial bank. 

As he undisputedly dons the cap of the most successful CEO in town, ShareSansar.com met Mr Serchan to get some insights about Nepal's banking sector and to find out what plans he has up his sleeve to take the group to new heights.

How did your journey in the banking sector begin?

I was born in Baglung Bazaar in the year 2029 BS (1972 AD). After completing my SLC from Baglung Bazaar, I moved to Kathmandu for further studies. I finished my MBA from Shankar Dev Campus. I joined Nepal Bangladesh Bank as junior assistant immediately after appearing in B.Com exam from Shanker Dev.

I worked there for four and a half years and then left it to join NCC Bank as a junior officer. There, too, I spent around four years. While I was at NCC, I was promoted to the position of branch manager and in that capacity I established two branches--one in Narayangadh and the other in Pokhara. After working at NCC for four years, I went abroad for further studies.

I came back after two years, around the time when Prabhu Finance was just established. The chairman of Prabhu Group is a close acquaintance and he had called and asked me to join the company in July 2006.   

Tell us about Prabhu Group's success and growth.

When I took over Prabhu Finance Company Limited it had Rs 28 crore in deposits and Rs 20 crore loans.

I could see what the chairman of the group was aiming for. He wanted the company to grow and go as much ahead as possible. So my main task was to groom the company and explore potential areas of growth.

At the time, finance companies were not known to expand branches. There are finance companies older than Prabhu, yet they still serve a fixed area and operate from a single office. But we went ahead with the plan to expand our branches throughout the country. As a finance company, before becoming a development bank, we already had 50 branches.

That became possible because we were the second largest company in the money transfer business and we were able to utilize that platform. What we did was opened branches in the places where the volume of remittance was high. It was convenient for our customers. They didn't have to return empty handed or with a smaller amount than they were expected to receive. We started giving them full payment, timely payment and payment as per their wish. Side by side we also started requesting them to open account with us.

To focus on customers' convenience is very important for the success of any business.

Within four years (2006-2010/11), the size of deposits at Prabhu Finance grew to Rs 10 billion and that was before any mergers. Our loan size was Rs 7 billion when we were still only a finance company.

That figure was much higher than our own expectation. We had only thought of taking the company to the size of Rs 1 billion. We hadn't thought beyond that. But after we crossed that mark and after we had many branches--from where we continuously received positive feedbacks--our business grew many fold.

One of the founders of the erstwhile Global Bank and the people who conceptualized Weston Union, IME and Annapurna Travel were part of our group. But later we decided to pull out as we wanted to establish our own bank. It was after that we decided to purse merger. We merged with one or two development banks and became a development bank. Within a year of becoming a development bank we merged with Kist Bank.

Looking at the figures after the merger, nobody, not even we ourselves, had thought that we would reach this stage so soon.

May be we were just lucky but then the best thing for our company was that we continued to receive very good response from customers. That motivated us. Customers themselves called us to know about our services.

We have disposed and sold many properties after negotiations with customers. We have never tried to impose anything on customers. Had we followed that approach, we would never have succeeded. Instead, we have waived penalty interests, interests on interest and many other charges wherever possible.      

We try to give them such options that they don't feel pressure or feel bad about our company. That's why our customers are very happy with us and they are happily willing to dispose properties.

Even those who have failed, we still encourage them to bring up plans and projects that  could work and we tell them that we are willing to walk by your side once again. Business has its own cycle. Someone who is at the top one day could be at the bottom the next day. And this is Nepal. There is no certainty about anything here.

Is merger and acquisition a centerpiece of your growth strategy?

Yes, you can say that merger and acquisition is one of our core strategies. For one, the Nepal Rastra Bank was in no mood to issue new licenses. And then there is the capital injection requirement. The amount required is very high and it would have taken some time for the existing group to accumulate such a huge capital.

The rules require commercial banks to have Rs 2 billion paid up capital. In view of these factors, we decided to take the merger path. Before Kist Bank, we had been in talks with Grand Bank. But at that time they had too many terms and conditions. Now they are willing to merge with us without any condition; they just want us to take them over. They have not demanded any position or set any requirement, nor have they sought any position in the board.

Around that time we had also began the process to take over Nepal Development Bank. The bank had already entered liquidation process and the shareholders had lost faith in the company. The process to acquire NDB is in its last phase now. We already have got the permission from the NRB and now we are awaiting a court verdict on the issue. Since it was a company that entered liquidation, the court had set some terms and condition for the liquidator. The company will formally come under our flagship after court gives the clearance.

What do you look for in companies you want to acquire or merge with?

When we enter a merger process, the first thing we want to know is whether the merging partners are willing to accept the name Prabhu or not. Prabhu is now a nationally and internationally recognized name and it would be easier for us to enter the market with that name. We may accept few members in the board, the CEO might change, but the name Prabhu has to be there. So far we have succeeded in convincing the partners and I believe it has helped create a positive vibes in the market. 

Apart from that we look at the potential for business expansion, which means we see how much free capital the company has. You can’t expand business without free capital. It is not possible to expand business by taking over small companies. 

For the way we want to grow, expand our branches and meet the expenses, the size of our business has to be Rs 60-70 arba. At present, we have a balance sheet of Rs 40 arba. If we could add Rs 20-25 arba more we should be able to provide returns to stakeholders by meeting all other criteria.

For that, we need to have sufficient capital and meet the criteria on capital adequacy ratio. So, we see what contribution the company we are merging with or acquiring can make on that front.

After that we analyze asset customers and loan customers of the bank. For example, if we are able to manage the loans of the customers of Grand Bank, we will be able to recover about a billion rupees.

The bank’s major non-performing loans include Rs 20 to 30 crore with Agni Air, about Rs 18 cr with a hotel, Rs 22-25 crore with a real estate company with 22-23 ropanis land in Budhanilkantha, Rs 22-25 crore with a hospital in Maharajgunj area. If we are able to manage these customers, we will be able to recover Rs 1 arba from them.

And we are sure that we can manage it.

In this fiscal year we will earn profit from our own bank. We will acquire Grand Bank in the first month of the next fiscal year and from the same year we will earn profit from there as well. Grand Bank has Rs 2.5 arba of non-performing asset (NPA), which has been provisioned. From there we can inject Rs 1arba to Rs 1.5 arba back into our business through write-backs.

We believe, within next three years, we will become so much bigger that we will never have to worry about income generation.

Aren't you taking risks by pursuing merger aggressively and giving out loans at a massive scale?

No risk, no gain is a well established proverb. Having said that there is no need for us to take high risks. We are moving ahead very selectively in case of loans. As I have already said, we have approached big and well-established corporate houses whom we don't see as risk. We have also increased retail banking and consumer lending on which too we don't see any risks.

What we consider risks are the loans from the past. The faster we recover them, the sooner our position is likely to get better.       

As for our aggressive acquisition strategy, we invest only after we see possibilities. People often say that Prabhu sets its sights on struggling financial institution. We know that there are problems in the companies we take over, but we don't move ahead until we see the possibilities.

For example, everybody knew that Kist Bank was in trouble, but nobody could see that there were possibilities, too. We understood it and we decided to give it a try. Of course, the attempt was fraught with risks big enough to take us down entirely.

But we look at customers differently. Most of the customers of Kist Bank were known to us and we knew we could manage them. We have followed the same approach with Grand Bank.

Those who see from outside only see problems not possibilities. We have only tried to show that there are possibilities as well.

What is the reason behind the bank's splendid income in the second quarter?

Net interest income, recovery, and other income have improved side by side. As we moved from first quarter to second quarter, we managed to grow our loan portfolio by Rs 3 arba. Within three months period, loans grew from Rs 24 arba to Rs 27 arba. We succeeded in attracting big corporate houses and gave them sizable loans. To grow the loan portfolio by 3 arba in 3 months is not possible through retail banking.           

That increased our interest income and in case of recovery, not just principal, we could recover interest as well. Meanwhile, other income also doubled over the period.

It proves that our approach is effectively working in the market.

Are you planning to enter into the merchant banking sector?

Yes, very soon. We will announce something in that regard within this month. We are in the final stage of acquiring a merchant banking company soon.  We have already forwarded the consent letter for a possible MoU to the merchant banker that we are in talks to acquire. The deal may be finalized by next week.  

Do we need more regulation or less regulation?

It’s not necessary that more regulations or tight regulations will bring better results. The most important thing is education. It’s very important that both the buyer and seller are educated.  If customers are educated, they can differentiate between what is good and what is bad for them.  Nowadays, we can see that banks provide 25 pages of documents to read. Who has the time to read it? Customers just come, sign and leave. What is lacking is the knowledge about how things work? What are the terms and conditions? In my opinion, 95% of the people do not have any understanding about it.

Who will bring this awareness?

It is a joint responsibility of the government, the central bank and other banks.

And how important it is for the customers to make efforts to educate themselves?

Yes, customers should be even more responsible about it. Without customers' consent, banks cannot force anything on them. Everything will be easy if customers are able to state what they want and under what terms and conditions. I will again emphasize that educating everyone and making banks more accessible is more important than having tight regulations.

What are the changes needed in the banking sector?

In my opinion, we have made the banking sector complicated. We say 60-65% of the people still do not have access to banking. Why is that the case? That is because we have made things complicated. Many among the common people don't understand the processes and language used to describe banking product and services. So it is very important to simplify the whole process so that the services are available and accessible to all.

At present banks offer same services under different names, add different features to them and that is what creates confusion among customers. That also creates room for manipulation.         

At present, only a limited number of people have access to banking. We are only focusing on the good, advanced areas of the country and serving limited number of same customers. Every bank has targeted the same markets with same customers.

Although private banks were allowed to set up shop long time ago, we still cannot see satisfactory developments in the field of agro sectors, industrial sector, trading sector. Once in a while, we see new entrepreneurs emerge, but it is difficult to predict how long they can survive?

We don’t have proper plans for the economy. The contribution of remittance to the country's GDP is 30-35%. What will happen if we don’t have remittance? Having no plan or just Plan A is dangerous. We should have Plan B, C and D. If we don’t come up with other plans soon then we will be too late. 

As a bank we also have responsibilities other than just earning profits. We really need to be close to our customers and see them through their ups and downs. If the intentions of the customers are not wrong, then banks need not keep pushing them. A bank's intention should never be to squeeze customers and bring them on the road.

What type of governor is needed for the financial sector?

Firstly, the governor should be the one who understands the country not just the financial sector. After that, he should have a good knowledge about Nepal's economy. He should know what turn the economy will take? He should know which sector should be in the priority. At present it is hydro and agriculture. We need to invest certain percent on these sectors. The governor should be someone who can give productive suggestions to the government so that Nepal's economy could progress rapidly. The governor must be capable of taking all stakeholders side by side and should not be biased.

Other than that, a governor should have good knowledge on monetary policies, economics, and management. Someone with good relations with banks, business men, government and should be able to balance those relations. Most importantly, he should know his country well.

What is Prabhu Bank’s plan for the next five year?

We had prepared a four-year plan but Grand happened as we were in the middle of that plan. We hadn’t figured it in that plan. They approached us because of the relationship we had.

Now Grand Bank has settled down a bit. The customers of the bank’s various branches are getting money. They are also getting their dividend. Big deposits have stayed idle and there is no panic situation for small depositors and they have been able to send this message. Now, our focus is on to make the business stimulant. We are considering 4-5 elements regarding it. Like, increasing the bank’s internal strength, increasing its asset size, focusing on other income like trade, finance, among others.

Next step would be to develop wings like insurance, merchant banking remittance, microfinance which we have already sent for NRB approval. We are trying to complete the circle of the finance sector.

The reason behind the take over of a merchant bank is that we plan to apply for the issue manager of hydropower companies. We will file applications with 25 companies and expect to work with atleast 4-5 of them. Once we have our own merchant banking arm, we hope to become issue manager for at least 5 hydropower companies, in other 5 hydropower companies we can go jointly.

As a merchant banker, we might get business from other companies, too.

What plans do you have for your Corporate Social Responsibility (CSR)?

We have a different approach to CSR. For this year, we are going to sign an agreement with Tilganga Eye Hospital. It has already been passed by our board.

We will support 10 eye camps in different parts of the country. We will provide some form of support for as many operations as we can, but we will pay fully for 100 operations. A single operation costs nearly Rs 80,000. 

We carry out several small initiatives occasionally. We don't like to trumpet what we do and prefer to work behind the veil. Last year, a program was organised and poet Madhav Prashad Ghimire was felicitated. We made the renowned celebrities read his poems. The program was highly appreciated by all. We will be doing such program this year too.