Pouring capital ourselves is far better option for us than going for merger

Headquartered at Birtamode, Jhapa—the eastern region—Excel Development Bank is providing its services in Illam, Jhapa and Morang districts. The bank is promoted by a group of experienced and highly motivated individuals from all walks of life including, professional bankers, entrepreneurs, educationalists and technocrats. Dinesh Kumar Pokhrel is the CEO of Excel Development Bank. Before starting the banking career from Nepal SBI Bank on 2001 AD, Pokhrel had experienced the government job on various capacities for a decade. During his stint with Nepal SBI Bank for another one decade, he was the operation head at Nepal SBI Bank’s Durbarmarg branch, corporate credit department Hattisar and branch manager of Narayanghat branch office, among other responsibilities. Later, he joined Pashupati Development Bank Banepa as its ‘second-man’ and the bank eventually merged with another institution to become Axis Development Bank. He quit the Axis Development Bank when it was seeking the merger with Civil Bank to join Excel Development Bank on Shrwan 1, 2070. During one-and half-year tenure with Excel Development Bank, he has taken the bank to new height. Expansion of its outreach, raising capital, ensuring handsome profit and return to the shareholders and adding modern and technology-based banking services and products are CEO Pokhrel’s tangible achievements in his short tenure. ShareSansar caught up CEO Pokhrel at his Birtamode-based office to talk about the broader aspects of the bank, his further plans, challenges and what it means to operate a regional level development bank, among other issues. Excerpts:   

This bank is considered good among the development banks in the country as well as ‘number one’ bank in Eastern Region. What are the reasons behind this success?

The bank started its operation when there was presence of very few banks and financial institutions. Since the bank was promoted and started by the locals, it received support from the locals from the early days of its establishment. The bank gave priority to the branch expansion at the rural areas since its inception. It has 12 branches in Jhapa alone and 15 outlets in Fikkal, Ilam and Biratnagar. It was easy for the locals of the remote areas to get the banking services who were otherwise deprived of the financial access. Locals support to the bank continued due to network outreach and the reputation of the local promoters also helped in the growth of this institution. Most of the BFIs which have failed not due to the lack of banking knowledge or other reasons, but due to the misuse of authority from its board of directors or the management. This institution was immune from these all problems from its early beginning as there was locals would keep constant tab in this bank plus the management’s high level of professional integrity. We have been offering return to the shareholders every year. Even when we were offering 50 percent of bonus shares, our bank’s share price is hovering around Rs 840. The return is so handsome that nobody should hold ill intention.

Your bank tapped the opportunities of the situation when the presence of other BFIs was very low. However, other BFIs have currently increasing their market presence now. What are you strategies to compete with them now?

The low presence of other BFIs and the social reputation of the local promoters were instrumental for the business growth of the bank in its initial days. Now there are branches of 27 out of 30 commercial banks here in Birtamode alone while there are other branches of the commercial banks in Damak, Chandragadhi and Charali, among other neighboring towns. Similarly, there are other local development banks including Kankai Bikas Bank in Jhapa, Pathibhara Bikas Bank in bordering areas, Birat Laxmi Bikas Bank of Biratnagar, Miteri Bikas Bank of Dharan. With the rise in the number of BFIs in recent years, we should have to increase our outreach and take our business to new areas where other BFIs are yet to reach to sustain ourselves. In many places, we were the first to provide the banking service so that we are still enjoying the business there. After I joined this bank last year, I am trying my best to ensure that we do not lack any banking products that other BFIs are currently offering. Technology based banking with safety is also our current focus. Learning the experiences of a bank which faced a trouble due to bad intention of a branch manager, we are also trying to ensure broader control in the bank. As part of that, I have made the data system centralized. This will enhance the safety of the transactions of the customers as nobody except system department will have the access on it.  From Mangsir, we have started SMS and Mobile banking services to our clients. Likewise, we are starting ATM services from this Poush. Similarly, we have also changed the traditional way of loan assessment. We have introduced product based loans. Recent fraudulent cases have become an eye-opener for us. Due to these all, we have changed the client assessment system. We are not only complying directives of Nepal Rastra Bank in this regard, but we are also far forward than some commercial banks. Still we have to remain under the ambit of a development bank and it will be difficult for us to do business if we start follow and look better than a commercial bank. Remaining under the parameter of a development bank, we are doing our best to follow the standard method of assessment. This will help to strengthen the risk assessment, increase greater control and bringing technology based products gradually which means that we are not going to be left backward. We are also working toward establishment of the remote banking/branchless banking as opening the branch will be difficult for us to maintain the overhead cost and capital. We introduced new software in the bank, started mobile banking and soon beginning ATM services, started Electronic Cheque Clearance a year ago, ABBS is at par without any charges, we have centralized data system and we have already signed agreement with CDS to dematerialized our shares. I have been giving priority in the technology and the cost involved in it is investment for the company, not expenses. The cost brings convenience to the clients as well as it benefits the bank in a long run.  We are expanding the online clearing system to our Ilam, Chandragadhi and Birtanagar branches by Magh so that it will be easy for the clients of those areas.

In the pace that you are soaring up your paid-up capital through rights and bonus shares, the profit of the company is not rising at that par. Isn’t it going to affect the bank in its dividend paying capacity in a long run? What are your plans to increase the profit of the bank?

When we look the financial report of the bank of the first quarter of the current fiscal year, it looks like that the return in the review period as compared to the corresponding period of the last fiscal year has fallen. The profit seemed to be slightly dropped in the first quarter due to the festival season and our focus on recovery. Today the share price of the commercial banks is not much due to the big size of the capital, and profitability also do not move ahead proportionately with the increase of the capital size. So, the profit size starts dwindling gradually which can be observed in many other commercial banks also. The share price of the ‘D’ class microfinance institution with Rs 1 crore paid-up capital is of Rs 1,900 to Rs 2,100. The institution with Rs 1 crore capital may not have resilience capacity to withstand even few risks which can eventually led to the shutdown of the company. In that situation, the share may not even have a worth of face value. The companies being operated on little capital are making more profit and the market is giving value to the immediate return rather than paying attention on whether that institution is running on proper norms and values of the banking system. It is obvious that with the rise of the capital, profit will gradually start to decline in the long run. Our expectation is that we will have the net profit of Rs 8 crore at the end of this fiscal year which means 30 percent return in Rs 25 crore capital. The three-district bank which is competing with all these commercial and other development banks is offering 30 percent return as well as offering the banking services in the rural areas where there is high over-head cost.

In what way, your bank is different than other banks with whom you are currently competing?

Many commercial banks’ branches here do not accept small denomination notes like Rs 50 and Rs 100. We are always mocked by those banks for accepting smaller denomination notes. What we told them is that that we don’t have authority to reject the money issued by the central bank just because it is inconvenient to us to handle. Being a developed bank, we think that we should be honest. Many of the banks did not even make phone call to their clients when the interest rate went up earlier. They have raised the interest rate twice in three months. Excel Development Bank did not raise the interest rate for six months when the rate went up in the market. We have not increased the rates even at the expense of some profit. Adjustment in the interest rates should not depend on the request of some clients. When we had raised the interest rates earlier, we should also gradually reduce it at a time of decline in the interest rate in the market. We had raised the interest rate up to 18 percent and we have around 4200 clients that we are lending. All of them do not come to us to ask to roll back the interest rate. However, what we did in last Ashoj was to make decision that we will not charge more than 15 percent of interest rate to any of our clients. The 3 percent drop in the interest rate at once incurred us a loss of around Rs 30 lakh in total loan. The interest rate drop decision was not on the basis of the application of our clients, but it was spontaneously from the side of the bank. We did it three times—Chaitra, Jesth and Ashwin—within a period of seven-month. There is also benefit to the bank as slashing interest rate upon the pressure of clients will compel the bank to reduce the rate drastically while we can do it ourselves gradually. The commercial banks do advertisement of the product that it offers the lowest interest rate and the clients understand that this is the general interest rate of the bank, not understanding the fact that the product rate advertised by those banks is lowest and comes up with conditions. If we do not reduce the interest rate today voluntarily, we will not have a morality to raise the interest rate tomorrow. Apart from doing honest banking, we should also have to increase our social involvements as we are the local bank. Though we are paying high taxes and we are the biggest taxpayer of Mechi zone for last two/ three years, we also have extra corporate social responsibility.

For the aggressive and large-scale lending, your current capital adequacy ratio (CAR) may not be sufficient. Though you have been offering handsome bonus as well as rights shares, are there any other plans, particularly merger, on card, to raise the CAR to further expand business?

The capital was tight when I joined this bank. The bank was running at around 11.5 percent CAR. I had seen the lending expansion possibility when I joined the bank. However, the lending capacity of Rs 40-42 crore went down due to the lending policy of the NRB. We were required to maintain the capital by giving 100 percent risk weightage to the unutilized limit. Sooner or later, we were bound to maintain this norm set by the central bank. Rather than adhering at once when imposed, we opted to move ahead only by maintaining that requirement. We have maintained Rs 26 crore capital for the risk of the unutilized limit which means that we lost the lending capacity of the amount equal to that provisioning. Similarly, we were also required to set aside 5 percent, or Rs 16 crore, of the total assets for the operational risk. This in total means the bank’s lending capacity of Rs 42 crore went further down after I joined this bank. The bank had a loan of Rs 1.42 arba when I joined. Now it has soared to Rs 2 arba. It’s a big jump compared to the situation when the bank had to shut its lending business. There can be many options within the balance sheet of the bank in such situation. Like, whether we can remove the bad quality of the assets from the book by auctioning off those assets which will help on reducing the risk weightage. Similarly, we can plan two or three months earlier and make a profit projection and assess the CCD (credit to core-capital-cum-deposit) ratio so that we will get a future picture. This will help us on planning the deposit collection. We can calculate the lending on the profit basis and move ahead on ‘hit and trial’ modality. These all helped us to increase the lending in our bank within this short period. I made the deposit stagnant. CCD went up so did the utilization of fund. The cost of deposit went down as the volume of deposit remained stagnant. Lending jumped and the return also is increasing. Though I might have reduced the rate of lending, the volume of the loans climbed. The profit size that this will give us plus Rs 5.25 crore we will get from the rights shares will sustain us for another 1 or 2 years. Still, this is not a long-term solution. The CCD portion has reached 68 to 69 percent now. The size of the profit will increase in the days to come as the size of lending has surged. The new capital we will be generating will resolve the problem of our capital for one or two years. If there will be the capital deficiency in future, the issuance of rights shares and the merger are two other alternatives. The immediate plan of the bank for merger was postponed as the bank opted to issue rights shares.  

There were talks of merger of your bank with Kalinchowk Development Bank. Did it fail to materialize?

Yes it was under negotiations, but the plan has been pushed farther as our bank is now going ahead with the issuance of rights shares. They have also issued their shares and now their recent AGM also decided to expand their business to reach 10 more districts by arranging Rs 20 crore of capital. Since we have warded off our problems for a time-being through rights shares issuance, we have also postponed the merger plan. Also, Excel Development Bank does not need to go for the merger to expand our business volume. We have been able to increase the deposit by Rs 50/60 crore and Rs 30/40 crore loans ourselves. Our customer base is equal to that of a commercial bank. We have 42,000 customers. Merger for us is just of arranging the capital. Likewise, we should also ask a question: Is it only the good stuffs that we will be getting from the merger? The problems will also come together with the merger. So pouring capital ourselves is far better option compared to the merger. Had it been a lack of capacity to compete, high cost of fund, lack of technological advancement and higher risks that the bank is seeing due to the lack of knowledge about the banking in the management, among other reasons, for us to go for merger, we should have adopted the amalgamation at any cost. However, those are not the cases for us. We are sound on other indicators, return and compliance. Not a single change in the figure of our balance sheet has been made by the Nepal Rastra bank except general comments that other banks also receive.

What are the plans to utilize the capital raised from the rights shares?

Once we get Rs 5 crore from rights shares, we will become 10-district development bank. Rather than rushing toward Kathmandu, we will be opening our branches to Panchthar and Taplegung. We have our strengths in this region. We will open our branches in these districts within Asadh as we will be issuing our rights shares by Chaitra. We have already made the financial projection and finalized everything with the issue manager. What we are just waiting from our AGM is now a clearance of the drop in the percent of rights shares due to the bonus shares adjustment. Though the volume of rights will be the same, the percent of the rights shares will go down to 25 percent against 35 percent that we have earlier planned.

The liquidity surplus in the banking system has become a nightmare to the BFIs. How much impact the excessive liquidity surplus has made in the banks of this region?

At a time when there was a liquidity crunch in the banking system, Excel Development Bank was like a powerhouse. Even the commercial banks of Kathmandu used to call here to ask money with us. At a time when our deposit was around Rs 2.75 arba deposit, our lending used to stand at Rs 1.42 arba. This means we were holding the liquid fund of more than Rs 1 arba. Many banks used to seek money with us. At that time, the interbank lending was conducted even at 15 percent interest rate. The banks used to borrow the money in such a high interest rate for a day or two just to maintain Statutory Liquidity Ratio and CCD rather than breaching the compliance of the central bank. The situation is just opposite now. The interbank lending rate is being conducted at 30 paisa and 40 paisa and its further plunging. The yield in the Treasury bill is a bit higher than 0 percent. So, all banks have a liquidity comfort. Banks are reducing the cost of deposits. As per the international banking norms, the interest rate should not have gone down below the market inflation. If the deposit does not yield even the return equivalent to the inflation rate, the money do not come into the banking channel.  Why would public parked their money in the bank if it don’t give return as much as the market inflation. The banks’ rates are tied up in the international market with the inflation as the inflation rate hover around 2 or 3 percent. The market of our country is not under the control of the government. There is not official data on what is the exact inflation rate of the country. If the government gives the data of 12 percent inflation rate, it may not be the accurate and real inflation rate in the market. We don’t know the real price. If a tomato is Rs 30 per kg today, the rate might skyrocket tomorrow to reach Rs 50. Due to the lack of tie-up between the bank’s interest rate and inflation rate, it may increase the risk of money going outside the banking system. Nepal Rastra Bank is introducing various formal and non-formal measures in recent months. It has been urging the banks to increase the interest rate of the deposits. However, the lending rate has gone down so much that there is no room for the banks to slash the rate of the deposits. Housing schemes are being introduces at 7.99 percent interest rates and the auto loans is coming at 8.5 percent.

What would be the response to any proposals from the ‘A’ class commercial banks for merger or acquisition with/of your institution?

It has been a long time since the merger is being practiced here in our country. We have also talked and discussed with many institutions for the merger as well as there were also proposals from many institutions. As far as I have understood my board and promoters in last one year, what they think is that our institution is sound and profitability is also good. We have arrived at this point on our own capacity and identity. Their view is that lets not move to merger in a way that ends our identity. What’s there to achieve by growing at once and becoming a national bank? The performance of a national development bank is also same like ours and what is the solution just by becoming a commercial bank. What the commercial banks are doing different than us? They are also floating the same loans in housing, auto and other sector. They are different than us just because they are doing the transactions of Letter of Credit (LC). The concern of our board and promoters is that our identity should not collapse and the profitability should not go down. It’s not possible to match these two conditions when we go in the amalgamation with a commercial bank.  As soon as we start merger process with a commercial bank, they will be thinking that they are the ‘A’ class commercial bank and a junior partner is being merged on them. The name of our bank may not be retained when we go merger with commercial bank and the return will definitely drop. The return will drop when the capital base is bigger. So the possibility of merger with a commercial bank immediately is very slim. Merger with an equal or relatively smaller partner and become 10-district bank might be possible. Yet, that chance is also almost going to end. Still, the board and promoters play bigger role in the merger than the management. We will only advise to them.

The earlier AGM of the bank was discussing the proposal of changing promoter/public share structure to 51:49 ratio from 70:30 ratio. Is the upcoming AGM going to take final call in this regard?

The earlier AGM has discussed this proposal to make the share structure to 51:49 ratio thinking that it will benefit the bank in long run as the capital burden will not fall under the shoulder of the promoter shareholders. Other banks are also gradually making similar share structure. There was no time left us for getting final approval from the Nepal Rastra Bank last year before tabling this proposal to make such structure. According to the NRB requirement, we can only table such proposal by getting the approval from the central bank. When the issue propped up, we were about to issue the notice of the AGM following the approval of AGM from the central bank. We had a meager time left to seek the central bank’s nod on tabling the proposal of change in the share structure. Since there was no substantial difference on getting the consent from the AGM before or after, we put the agenda in the AGM. Later, it went to the central bank and stuck on pending for a long time. We were not alone in this case. There were 11 institutions including us to file the decision similar to this nature. This was not accepted by the central bank citing the procedural problem. However, now we are continuing with keeping up the 70:30 percent of ratio structure.

The capital/share/secondary market of the country is largely centered in Kathmandu. What is your assessment about the perspective of the local investors of the region toward the share market?

Local investors think that the share market is for putting their investment rather than for regular or frequent trading. If the investors of the rural areas have money, they think lets pour it in the share market. It might also be due to the inconvenience for the trading. If it’s the investors of the town and understands the share market, their nature is of trading. Rather than holding for a long period, they tend to trade it and book the profit. It’s not easy like in Kathmandu for the frequent trading. It’s difficult process from here for trading due to the procedures to be followed for trading like filling form, settlement as well as other compliances.  

What are your further plans to take the bank at a higher position?

Our clients are the major factor in taking this development bank to this point. I would like to assure them that your bank will fulfill all banking needs. Be it technology based products or general banking services, we are gradually updating ourselves. So, our clients do not leave this bank to seek banking services from other, expecting that they will give them more services than us. Recently, we have started SMS/Mobile banking service while planning to bring ATM service by Poush and remote banking service soon. Check clearing service is also being expanded; dematerialized service is also started; we have started women as well as elder and disabled friendly special counter before the NRB issued the directive. In the days to come, Excel Development Bank will make investment more even at the expense of our profit for expanding and providing quality services to our clients. While the branch office of a commercial bank is just a processing center, we tend to provide the services promptly as per our local clients. We make decision of loans within three working days. Even if we cant provide loan, we will inform our clients on time so that they can look for alternative. We also want to go joining hands with new clients here.