The mantra of commercial banks is that neither can all entrepreneurs mobilize enough savings to meet investment requirements on their own, nor can all savers have entrepreneurship skills or courage to take investment risks. This is where a bank comes into play, which mainly through appropriate interest rate policies serves both the depositors and savers, and makes profits out of the gap between the cost of deposits and lending. This is how a traditional banking system used to function in the West. However, there has been a sea change in the variety of services banks extend to customers and in the ways banks make money. But Nepali banking system has failed to explore new avenues for making profits other than the spread between the deposit and lending rates, thus falling behind in bringing innovative products and services to lure both prospective depositors and borrowers.
Despite this, the banking industry, according to un-audited reports, recorded handsome profits worth around Rs. 15 billion last fiscal, beating most expectations. It was impressive at a time when banks were facing major challenges like slowing credit demand, high deposit rates and record low discount on treasury bills. However, these profits mainly came from non-banking activities rather than core banking businesses like lending and investments. For example, the interest income, the most crucial and reliable source of income for banks, was just 2.3 percent more than previous year’s figure. The growth in interest income was one of the lowest in recent years, and in fact negative when adjusted for annual inflation of 8.3 percent. That too was achieved owing to a wide spread between the lending and deposit rates as high as 7 percent in some cases, particularly during the second half of the last fiscal when banks quickly lowered deposit rates (without informing depositors in many cases) but resisted repeated calls from the business community to revise lending rates.
So last year the profits banks made were not from regular banking activities, but from one-time incomes. For instance, banks made a whopping Rs 3 billion from foreign currency exchange gain, due mainly to 12.1 percent depreciation of the Nepali currency against US dollar. Similarly, they made handsome incomes from non-banking activities like settlement of toxic lending extended mainly to realty sector or through liquidation of fixed assets in their possession in the form of non-banking assets. This released huge amount of incomes detained under loan loss provisions and surprisingly led to soaring profits. Such unusual activities also brought unusual results. The fact that Nepal Bangladesh Bank, the bank with probably the highest incidents of imprudent banking practices, earned the most profit in the period is hard to digest.
The banks might not enjoy the same good fortune next time. May be there won’t be as big currency depreciation incomes and extra banking incomes they made from settling problematic loans or selling fixed assets last year. As banks have already used all possible means to recover problematic loans last year and undoubtedly succeeded to an extent in adding the ‘good looking factor’ to their balance sheets, a huge pile of leftover bad loans is hard to deal with. So, as the economy that is entangled in messy politics is unlikely to contribute to impressive growth this year, chances are high that the banks obsessed with liquidity will face more severe adversities in coming days.
So, a million dollar question is: What is the right strategy to deal with the looming crisis? Surely, innovative banking products targeting young professionals from middle class will be a good approach to combat the fast-emerging headwinds. However, surprisingly none of the banks seems to be making a sincere effort to come up with innovative lending products targeted toward young professionals, a move that can broaden their lending base at a time when they have excess liquidity and are discouraging depositors through lower interest rate than the inflation rate.
The banks might argue they have enough mortgage schemes to cover for them, but almost all the schemes are based on traditional rigid EMI loans backed by city-based fixed assets as collaterals. The rigid EMI that compels the borrower to ‘pay fixed amount every month at any cost’ is keeping many likely borrowers at bay. In many emerging economies, EMI with flexible repayment scheme that allows borrowers to pay more when they have more money and vice-versa—but nonetheless have to meet the annual repayment target—has lured many young professionals afraid of possible EMI defaults because of unexpected fluctuations in their incomes.
Another failing of Nepal’s banking industry is lack of persuasive marketing strategies to sell products. As a result, we have virtually no record of banks approaching young professionals with good career prospects and who maintain a clean credit record, to sell their new products that finance durable commodities and assets. What the banks have failed to understand is that banking habit among middle-class professionals is fast developing in Nepal but it is focused on depositing savings, and far less in borrowings, due mainly to our conservative credit culture. That less than a quarter of those who regularly get their pay in bank accounts and maintain moderate balance, borrow from the banks indicates a huge potential client base for banks.
NEW BANKING PRODUCTS
Banks should broaden their traditional mindset of serving only the corporate borrowers and also target the young and up and coming professionals.
However, banks are showing no enthusiasm to tap potential clients already in market, who in the long-run will help develop a solid client base. They are putting no effort to identify new and potential clients from among young professionals. How many banks have a separate department or team that minutely tracks and maintains database of emerging young professionals? Perhaps very few. How many have staffs to regularly communicate with those potential borrowers to appraise them about various schemes and persuade them to buy at least one, in terms agreeable to both lenders and borrowers? May be none. It is time for banks to broaden their traditional mindset of serving only corporate borrowers and target young and emerging professionals who don’t go to knock banks’ doors pleading for finance but are ready to buy loan products if tactfully approached.
The blame rests equally on the central bank which seems unenthusiastic in promoting innovative banking by inspiring banks to explore new avenues of investments. For that, it should amend provisions that might hinder experimentation in new schemes without putting depositors’ savings in grave jeopardy. But, bank CEOs say they are neither urged to come up with innovative ideas nor do they receive positive response when they do. It is deplorable that not a single word was spent in this year’s Monetary Policy to spur innovation in the banking sector. It high time NRB and other banks came together for innovation. Make no mistake, the future lies in innovation; if you don’t innovate, someone else will come and hijack your market.