We have already thought about issuing rights shares if merger option does not work.

Dr Ramesh Kumar Bhattarai joined Janata Bank Ltd as its Chief Executive Officer (CEO) a year back when the bank was undergoing through the setback resulted from the heavy forex loss. Janata Bank has reported a massive – over 100 percent -- profit drop in the last fiscal year 2070/71. Its net profit has dropped to Rs 8.81 crore, down from Rs 19.73 crore at the end of the previous fiscal year 2069/70. The profit was affected largely due to a huge foreign exchange loss the bank suffered in the last fiscal year. Earlier, Dr Bhattarai was the administrator of Employment Provident Fund (EPF) where he worked for nearly three decades in various capacities. Though leadership at the executive level of the bank is something new for Dr Bhattarai, he has 14 years’ of experience of serving various commercial banks and public institutions as a member of board of directors. ShareSansar sat with him to talk about the reasons of profit drop, his plans to tackle the loss, bank’s possible return to the shareholders, its plan and the overall banking issues.

Excerpts:

You were the administrator at Employment Provident Fund (EPF) before joining Janata Bank Ltd. Isn’t it hard to lead a completely new business?

I did not work only as the administrator of the EPF. I had also worked as the director of various banks. I was not just the board member, but have also worked assuming various responsibilities in various committees of the banks for long time. So, I did not feel that the banking business a totally new to me. Also, the position of the CEO is all about taking the leadership. It means CEO should give the proper policy direction rather than understanding all the issues and process in depth because experts on all the issues are intact and in place to deal with those issues. Though joining Janata Bank after the EPF may seem totally different sector, in real it’s not totally new sector at all. And neither have I felt that there are any issues that I cannot address while remaining in this post.


The bank recently published its unaudited financial results of FY 2070/71. Though other indicators seemed good, the bank incurred heavy forex loss last year. Can you explain about this loss?

That is commercial loss. It is related to the non deliverable forward (NDF) which is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. Our bank had also entered into seven/eight such contracts. The dollar price witnessed a massive surge during that period and our position was opened at that time. Position open means we committed of ‘sell’ and entered into the contract, but we should have done the contract to ‘buy. This is what we missed at that time. However, the dollar price was appreciating each day on an unprecedented rate to reach at Rs 107 for per unit USD. I do not want to blame anybody for the wrongs, but there were lapses from the treasury department at that time. Position should have been left closed which the department could not pay attention.  Since we were required to book that loss, the profit was hit by such provisioning. There will be improvement from the coming quarter. That has been a good lesson for us to learn. However, we have been able to make-up that loss now. You can see the net profit of around Rs 9 crore of profit even after booking the loss amount of Rs 12-15 crore. This has also proved that the condition of the bank is improving.

Yet, there are some old issues like we entered into the interbank lending with Nepal Share Market and Finance Ltd which eventually ran into trouble. We should have to buy the assets of that finance company. We had provided loans of Rs 20 crore and we were required to buy Rs 40 crore of their assets which we did. We were left behind in buying such assets which means we have to buy relatively low quality of assets. This led to the increment in the provisioning. Likewise, there were three/four other projects that we had financed which defaulted. That also led us for more provisioning.


What is the status of loan recovery regarding the loss at Nepal Share Market and Finance Ltd?

We have to buy around the asset of Rs 40 crore of that finance company. Our 50 percent of the loans has already been recovered. We are in the process to recover rest of our loans. Couple of loan projects is still problematic whose debt servicing is not regular. There is possibility that we have to provision more amounts for the possible losses for those types of loans.


How is the overall health of the bank leaving the forex loss and loan loss of NSM?

Leaving the indicator of net profit, we are in very good positions judging from the other indicators of the bank. Deposit is increasing which means public trust towards our bank is also increasing; lending is also rising in a similar rate means more clients are coming to our banks; non-performing loan is also below 1 percent; we have enough capital adequacy; level of statutory liquidity ratio and cash reserve ratio have been always maintained intact; the expansion of network is also going good; we have apt human resource. The bank’s growth is steady. Unlike some banks which make rapid growth but face setback soon, we do not have such situation. Except some earlier setbacks, our approach is to make a steady growth in the days to come.


The banks which were established after Janata Bank are expanding their market aggressively. But isn’t your growth slow in comparison to them?

They are coming with their own strategy which does not necessarily mean we have to follow them. We have seen that at the beginning they lured the depositor with an attractive offer like 9 percent, 10 percent of interest rate on saving account which eventually came down to 4-5 percent. We never followed such practice. Depositors have never felt from our banks that they were misled. Janata Bank is moving very prudently. I do not rule out the setbacks in the coming days or we may have to struggle for two /three more years. But, after that Janata Bank would be such a stable and prosperous bank that Janata Bank would be counted as one of the best banks of the country.


How much prepared is your bank to implement the Basel III?

Even the banks are required to implement Basel III immediately, Janata Bank do not have any problems in regards to the provisions of the Basel III like capital adequacy, asset quality. We can comfortably adapt the Basel III principle.


The central regulatory bank is urging the banks to increase their capital. What is your takes on that?

This is very good. The banks will have to increase their paid-up –capital to Rs 2 billion as prescribed by the central bank. Since Janata Bank has already maintained such capital requirement, it does not have any problem in this regard. The central bank has said that it would be good to have more paid-up capital to Rs 5 billion. This is the encouragement from the side of regulators rather than the compulsion for now. We have been mulling over two/three ideas as part of our strategy. If there is the possibility of good merger than the capital can be doubled by going into the amalgamation process. Otherwise, increasing the capital by gradually issuing rights shares is not a big deal for Janata Bank. Until this year only, we are facing difficulties; earned less profit; capacity to offer low bonus shares. We should not have to be limited in the profit of Rs 9 crore in this current fiscal year like the last fiscal year. If we distribute bonus shares from the profit, that is also a good alternative for increasing our capital base.  However, we do not depend only on the bonus share distribution alternative. If there is any good bank for us which matches the banking culture, technology, capital size and assets quality to adopt merger, it would not be difficult to increase our paid-up capital to Rs 5 arba within 5 years. We have already thought about issuing rights shares if the merger option does not work.

You talked about merger. Are there any proposals of merger in your table?

Yes of course. We have got the merger proposals, but I cannot disclose the name of the banks who have proposed for the merger. We are under discussions on merger with them which is heading in the proper direction. Disclosing the name is not prudent.


It has been a year that you remained in the helm of the bank. What remained as challenges and opportunities to you?

The recovery of the old losses and bringing the old loans in track at a time when our profit has been squeezed and other BFIs’ profit is seen good and while investors were expecting a good return, it was not a cakewalk to convince them and give a clarification. That was a major challenge which is still on. The deposit level of the bank has gone up significantly compared to the period when I had joined the bank. The lending of the bank has gone up to Rs 16 arba compared to the Rs 11.5 arba when I had joined. The base of the bank has also expanded as our number of clients has increased. The number of depositors was 80,000 while I had joined, but it is now about to touch 1 lakh. Our focus is also slightly changed now. Our focus has now shifted to SMEs lending from the corporate lending. The institutional and individual deposit ratio of 60:40 was not met earlier, which we have maintained now. In nutshell, we are now completely adhering with the prudential norms.

You talked about the investors’ expectation. Since the bank’s profit has gone down last year, how much can you offer returns to your shareholders?

It is obvious for investors to expect as much return as possible. Even if I was an investor, I would have expected dividend more than the return that yields from the interest of the deposit that I park in any BFIs. However, the return of the bank is not like I invest today and I get instant return. The return should be sustainable of type. We will be able to offer 12 percent of dividend for next year. And, we will be able to increase such dividend up to 20 percent within the period of 3/4 years. Rather than the expectation of short term return if investors understand the long term return, this can easily address their expectations. And, another point is that the investment on banks is also about the prestige. You cannot weigh your investment by the returns, it also give you a sense of pride when you say that I am a promoter/investor of the bank. So the investors should be content on that way for the few years of a bank’s establishment. Later the bank will obviously give them good returns. We can say that we will be able to offer at least 12 percent of dividend from the upcoming year.

The profit of the overall banking sector has seen decline this year. Does this suggest that the banking business is moving towards the point of saturation and there are no opportunities for the banks for investment?

There are vast opportunities in the country but the climate has not been created for the investment. We are expecting 6 percent of economic growth in the country and containing inflation to 8 percent. How much investment is needed to achieve 6 percent of growth? We have also plan to graduate our country to the developing nation by 2022. For this we have to maintain 6 percent of growth each year. Is the current investment size is enough for attaining 6 percent of growth? We have to increase the investment. It is not enough to limit ourselves to those sectors only where we have been pouring our money. There is the need of mega infrastructure project. If we take some mega projects, the current liquidity is not enough for us. A single big project can easily absorb our current liquidity which means the current liquidity will be scarce if two/three mega projects are started. If we are supposed to support the policies that the government introduces, we should be now ready as we have very good scopes ahead. While looking now, the liquidity seems to be in surplus. I disagree with the statement that the business is near to the saturation or the investment opportunities are limited. A big scope for us in the economy is yet to open up. The door of the big scopes is yet to open. While it is opened, we will have a myriad of opportunities. For the time being where there has not been the avenue of investments, it may seem like the saturation is near. However, big scope is ahead. We do not have to wait much.

What are your lending priorities of your banks?

The regulators have already defined some sectoral lending like productive sector, agro sector and deprived sector, among others, which any bank cannot move ahead without addressing those sectors. We have to move ahead by diversifying our lending by addressing those defined sectors.  We have met those requirements of lending. Our focus is to increase our lending in the productive sector, mainly the medium size loans. Attempts will be toward making lending practice nationwide from the current Kathmandu centric trend.

But Nepal Bankers Association has put forth a demand to scrap the deprived sector lending requirement.

It’s not like it said that there should not be such requirement or banks should not lend on deprived sector. However, the demand was to review the definition of ‘deprived sector’ which will make banks easy to extend their loans on the sector.

Your bank is one of the banks which have the lowest interest spread rate. Do you think it will be sustainable by remaining in such a low margin?

Its not sustainable by remaining at 2.3 percent of interest spread. But, what I have been maintaining is that we can give good return up to 20 percent even remaining within 5 percent of interest spread cap. The big banks have also been able to offer 20 percent return or more than that by maintaining 5 percent interest spread rate. We can also offer up to that percent. Our spread is low means that our profit is also low, but this also shows how socially responsible are we. This should also be assessed. What all the depositors expect is the interest rate above or equal to the inflation rate and borrowers always want loans on as much as possible low interest rate. Janata Bank is the bank which has addressed both sides’ expectation. We will remain to this margin until we diversify our portfolio. We should not focus much on the corporate clients which we are doing now. We have to woo medium enterprises for the lending. We will be offering good return on deposit to the public and we will never take the strategy to offer on high interest rate and suddenly reduce it. It may take one or two years but the spread will improve soon with a pre condition that both the depositors and borrowers get justice.