Innovation comes in the banking business when there is profitability pressure in competitive environment.

Established in 1996, NMB Bank Limited is the first commercial bank of the country to be upgraded into a full-fledged ‘A’ class licensed commercial bank from ‘C’ class finance company.  Nepal Merchant Banking and Finance Ltd, the erstwhile name of the institution, transformed into the NMB Bank in May 2008. The commercial bank has now started a merger process with two other regional-level development banks. Chief Executive Officer (CEO) of the NMB Bank Upendra Poudyal terms the merger process a ‘preparation’ to make his bank ready for the competition with the international banks which are likely to enter into Nepal soon after the country takes a stable track. Poudyal, who is also the vice president of Nepal Bankers Association (NBA), began his banking career with Standard Chartered Bank, then Grindlays Bank, in 1986. He has remained at the helm of the NMB since 2000. Considered to be one of the intelligent and humble bankers, CEO Poudyal is credited for the transformation of a finance company into a commercial bank as well as the growth of country’s banking industry. CEO of NMB Bank Poudyal and vice-president of NBA sat with ShareSansar to talk about the amalgamation process of his banks, merger spree seen in the banking industry, regulator’s role and liquidity problems, among other banking issues. Excerpts:

Let’s begin with your bank’s initiation to go for merger with Pathibhara and Bhrikutee Development banks. What prompted you to go for the amalgamation?

We have felt a need to go for merger for a long period of time. I have raised the issue of merger for last 10 years as well as asking the Nepal Rastra Bank (NRB) to come up with the merger and acquisition laws and policies. While you compare with the size of Nepal’s economy, the number of banks and financial institutions is high. With the number coming down, the institutions are recognized and analyzed well and it will lead to the better governance and better regulation. The institution capacity will also be strong with capacity enhancement following the merger. With the institution getting bigger, internal and management cost can also be reduced. We have already come to the open market economy which means we should be ready for the international competition. So, what are the competitive advantages of our banks to compete with international banks? Maximum investment in the information and technology plus manpower and skill developments is required to withstand the competition. Bigger the institution bigger investment can be made to develop its own capacity and make it prepared for competition with the international banks that may enter into our market in near time. Otherwise, the situation may come when the institution will have to face the fate of natural death. We can learn a lesson from Malaysia where there were many banks and financial institutions earlier, which eventually came down to very few in numbers.  While the merger is the need of the hour, the mismatch type of amalgamation may result problems in the company. Such problems can be seen here in some institutions which had gone into merger. Though merger is important, bank should restrain from going into the merger in immature way or which cannot create synergy effect. We had thought and initiated the merger very long ago but we left behind because we were careful on making assessment on every aspects of the merger.  The process took time since we have to make pre-assessment about the merging partner on many issues like either we can culturally mingle with the particular company and the post merger complication, among other.

What would be the position of the bank following the merger and when will the integrated operation begin?

It may take some time to bring the operational efficiency in the institution after the merger. While talking about the position, we can talk from the basis of the balance sheets of the institutions. The profitability of the company will double. If the business is of Rs 20/22 arba, it would go further up. But, what I say is that rather than calculating the merger with 2 plus 2 equal to 4, the merger should be move ahead with 2 plus 2 equal to 5 or 6. We are moving ahead accordingly. Merger itself is not a big deal, but post merger integration complication is something what we have to think before. Some people will sit together to fix the swap ration, the approval will be acquired from the regulator and chartered accountants will combined the balance sheets. IT integration is something difficult. Finally, the completion of the merger will be announced and the joint integration will begin. However, the management of the post-merger integration is the biggest challenge of the merger. We are thoroughly working on each and every step of the merger and post-merger situation. According to the plan we submitted to the NRB, we intend to start the integrated operation of the merged entity by Chaitra end. However, we are making attempts to begin before that.

Can you please explain the plans to address the possible post-merger complications?

As I had also led the finance companies’ association, I have knowledge about the situation of the finance companies across the country. We have also worked with many institutions as the merchant bank. We have already thought about managing the post-merger integration in our own way. We have move ahead for the merger by wining each other confidence. Things may turn into worse if there is crisis of confidence among the aspiring merging partners.  Since our bank is running in quite different way and the bank is formed after the upgradation of a finance company, we have knowledge on every small details of such company like how the small company runs, what are the aspiration of the staffs and the modus operandi, among other. These all should be taken into consideration while going into merger. Due to these all reasons, I think this merger process will also reach to the conclusion in a distinct way.

Central bank is encouraging merger and the BFIs are also on a merger spree. But, don’t you think that there is a lack of assessment on what is the number of BFIs that we actually need or is viable for our economy?

Such assessment is definitely needed. While we look the total capacity of the banking system in today’s date, many banks should come together to finance even a single project of a big size. We are not in a position to finance a mega project. At the same time, the small level institutions have their own importance in the country like Nepal. As a CEO of a commercial bank, I also cannot say that commercial banks can cater the clients of all types in the economic structure of the country like Nepal. Commercial banks may not be able to understand the aspirations, needs, psyches and demands of every type of clients and introduce the product accordingly.  Regional level development banks, finance companies and cooperatives are undertaking such activities. So, the significance of small scale institutions has not declined. However, if the country’s system improves and everything starts going into a track, the small institutions may face problem for competition due to lack of skill development and enhancement of efficiency. The situation was different 20/25 years ago when we would not even open the bank account without a minimum balance of Rs 20/25 thousands while retail loans like housing and auto loans were not in practice. However, the economic structure has witnessed a sea change in last 20/25 years with big commercial banks also stepping into grassroot levels. If the small institutions do not make themselves bigger by enhancing their capacity or increasing the efficiency through investment in information and technology, they have a hard time ahead. So, the merger is a necessity. At the same time, such small institutions are required in the context of Nepal. However, there has not been any research to ascertain the exact number of the BFIs that our economy need or is feasible to the economy.

NRB has stopped granting license to new BFIs, except microfinance development banks. Do you think it is appropriate to stop issuing license in an open market economy system?

There is difference between other business and banking business. Banking business is not only a business. A big responsibility is associated with this business. If a bank fails, it can have very-very huge negative impact in the whole financial system. The bank should not look at the profit, but also fulfill its responsibility. Unlike other business which shutdown will have a profit or loss impact limited to a handful owners, the cost of bank shutdown has a multiplier negative impact not only to the depositors or investors, but to the whole economic and financial system. So the concept of regulating the banking license to an extent is very right. You cannot grant license anyone who comes asking you a permit to open the bank just because there is open market economy in the country. Having said that, the banking business and its system must operate in a competitive environment.


The banking industry of the country was reported to be grappled by the excessive liquidity situation. Has the problem resolved now with the NRB absorbing the excessive liquidity through ‘deposit auction’?

The problem has been resolved to an extent. However, we have failed to address this problem in a long run. Why the liquidity is swinging? Four/five years, banks suffered a liquidity crunch while there was excessive surplus earlier than that period. After improvement for some years, we again observed the excessive surplus situation. Though there is improvement in the part of liquidity management now, formulation of long and medium term policies to address the problem is must after a micro-analysis of the problem. Though we say that we have a surplus of Rs 50/60 billion, it can be easily absorbed if a mega project kick starts. The problem is also due to the lack of expenditure from the part of government. If the achievement of expenditure is made more than 90 percent, the requirement of the fund in the system will start increasing. As a banker, I am not in a position now to say now that we have excessive liquidity and neither can I deny that there is excessive liquidity surplus. The problem will arise again as we have not been able to diagnose the problem properly on why the liquidity is swinging and why it is problem and what should be done from the part of state, central bank and BFIs to resolve it.

The profit of the bank has squeezed in the last fiscal year 2070/71 in comparison to the profit of the previous years. What are the reasons?

It is largely related to the liquidity surplus problem. Non-funded income of the banks has not decreased significantly while the net interest income is less in comparison to the volume of the business growth of the bank. The interest margin has squeezed mainly because of two reasons. One reason is due to the liquidity surplus which has created competitive pressure to the banks to extend loans on low interest rates. Another major reason is that the banks which used to make earnings up to 4 to 5 percent interest in the non-loan-able 20 percent fund—which they are required to maintain—do not yield very low if nothing.  Literally none-yielding is because banks have to bid a little more than 0 percent interest rate in the treasuries. The interest yield from such treasuries even does not cover the paper cost of our bidding.   While we are paying interest to the depositors for that 20 percent fund, we could not earn anything from that fund. In some cases, we could not get that investment opportunity due to tight competition. This compelled many banks to dispose their cash at the central bank as cash reserve ratio (CRR) more than they are required.

Some argue that the decline in the profits of the bank indicates that banking business was heading toward saturation.

Bank should make itself innovative. Innovation comes in the banking business when there is profitability pressure in the competitive environment.  Banks should work in new ways, balance their operation at certain level or reduce their cost as well as other innovative ideas may come to withstand the profitability pressure. Saturation never comes in the banking business.

It is said that banks are floating most of the loans in unproductive sector like housing, vehicles or other due to the lack of investment opportunity.

If bank floats their loans to those who can afford the car, it should not be labeled ‘unproductive’. If a client buys a car, (s) he contributes in the GDP directly or indirectly. If you look the worldwide trend, the interest rate for this type of retail banking product is low. We are accused here frequently that we charge 10/11 percent interest rate to open an industry while extend loans on 8/9 percent to buy a home.  While you look it in a superficial way, you are right. But, if you look from the bank’s perspective, the bank fixes its interest rate by keeping in view some factors like risk level, delinquency level and other.

NRB will enforce the 5 percent interest rate spread cap to the commercial banks from this fiscal year. Have the banks now agreed to accept the cap, albeit unwillingly?

After NRB introduces any directive, we cannot say that we are ‘unwillingly’ accepting it. However, the measure to fix interest rate spread fundamentally does not encourage the efficiency of the bank. Let’s see some examples from the cost part of the bank. While a bank opens many branches with an objective to cater as many clients as possible, the operating expenses of the bank is high. It may take 2/3 years for the branch to come into break even and 4/5 years to come to a certain level of stabilization. Until that period, branch incurs cost to operate, run management, hire and retain staff or linked it with connectivity apart from rental and the fixed assets. The service of the banks are refined and enhanced in comparison with few years earlier. Why is this so? This is not possible without charge. It involves cost for the banks.  There is cost in bringing the efficiency in the bank. Spread rate cap only includes the cost of the fund. We have to cover those costs also from this spread. By regulating the spread rate, will we be bound to compromise the efficiency and the quality of the customer services or not?  The spread rate might create profitability pressure which may ultimately lead to the compromise or impact in the quality of the services. If banks are making excessive profit, it should be controlled in another way rather than fixing the spread rate cap. Banking system, its efficiency or capability may slide further due to the interest rate spread cap. Banking business is a long term sustainable business and if banking system remains strong, the profitability also remains strong. This leads to the strong economy. Banks hold immense responsibility and the banking system is connected to whole 3 crore populations at some point. The system should be run responsibly. We know very well that NRB was compelled to introduce this sort of measures as there were certain distortions from the part of some BFIs. We should not deny this fact. We cannot move ahead like other business with an entire target of the profit. If we start operating responsibly, the situation may not come for the NRB to make moves.

Don’t you think that NRB is heading toward micromanagement of the BFIs by introducing the provisions like limiting the terms of board directors and CEO?

NRB has come up with these types of policies after some distortions were seen in some institutions. Attempts should be made to prevent the situation to come for the NRB to introduce such policies. NRB should bring such institutions on track even by taking punitive actions against them. This will make other institutions careful to not repeat same misdeeds.

NRB has recently instructed the foreign non-BFIs to offload their holding in Nepali BFIs by mid-July 2015. Since there is holding of Malaysian company Young Leon Real Estate in NMB Bank, where has the process of divestment reached so far?

They are looking for the options. In this particular case, our foreign partner is not happy with the decision of the NRB. What they said is we have made investment 18 years ago in 1996 and considered the investment as a matter of pride. They do not want to give up the investment due to the intimacy they have here. They had not taken the directorship earlier in the board thinking that it would incur cost to the bank, but they are now in the board. They are not content with the reason behind the instruction which ask them to quit. The explicit policy of investment allowing only to the NRB- regulated institution came later while they had made investment here long time ago. They have made request allowing them to continue with their holding, putting forth logic that they came ahead for the investment than the explicit policy. They have even said that they will make written request to the central bank. If the central bank will not consider the request at any cost, they will be bound to accept the law of the land. Since this is the promoter shares, price may not come for them while divesting it in hurry. Also, this measure will also send a negative message while we are saying that we encourage foreign direct investment and also talking about opening the stock market for the foreigner. The messages that the retrospective laws are enforced in Nepal and the policies get frequently changed do not bode well to the image of the country which is seeking to open the investment avenue for the foreign investors.

What are the further plans of the NMB Bank?

We have already gone into the merger process. We are also moving ahead with introduction of new products while at the same time we will keep on refining and enhancing our existing products. Apart from that, successfully concluding the merger process and managing the post merger complication are our focus.  Representation of the bank across the country is our desire. This is reflected in the current merger process. One of the merging partners is from eastern part of Nepal while another is in western. To fulfill the gap between these regions, we will either go into the merger or acquisition. Branch expansion is the regular plan. Sincere initiatives to seek, identify and bring international partners will also be taken. We have our own ‘NMB-2020 Plan’ and we will reach at the top level by that period.