Economic growth and profits of BFIs has been a long standing academic debate

Anirvan Ghosh Dastidar is the chief executive officer of Standard Chartered Bank Nepal. He has held a variety of senior positions in the Bank, including chief executive officer in Sri Lanka and chief executive officer in Philippines. His extensive experience spans risk and corporate governance and both wholesale and retail banking. Dastidar was serving as chief executive officer and head of Retail Banking in Brunei prior to his Nepal assignment. He was responsible for delivering double-digit revenue growth and in reinforcing the bank’s commitment in Brunei as the bank celebrated its 60th anniversary in 2018. Anirvan, who started his career with ANZ Grindlays in India, is an Indian national and holds a Bachelor’s Degree in Commerce from University of Calcutta. He has undertaken various Corporate Management courses including that from the Said Business School, University of Oxford and INSEAD. Karobar National Economic Daily Editor Kuber Chalise did written interview with Dastidar on current banking scenario in Nepal, pandemic-impact in banking sector, and central bank’s role during such hard times. The excerpts:

The global pandemic Covid-19 has hit businesses across the world very hard. In your opinion, how much has it hit the Nepali banks?

Banks are an integral part of Nepal’s growth and the Nepali economy. Like all countries, Nepal has been severely impacted and hence the Banks in Nepal -as we see both slowdown and related impacts in the rest of the economy.  Job losses especially in the Travel and Tourism Industry, disruption for the Nepalese diaspora leading to slower worker remittances, slow consumption are also impacting Banks with excess liquidity with nowhere to deploy. Further the days of enjoying high margins are over and with subdued economic activity, banks are likely to struggle getting their Balance Sheets in order.

The balance sheets of Nepali BFIs of the last fiscal year however do not paint very much a bleak picture as expected.
Fundamentally Nepal is blessed with a very stable Banking Industry with banks well capitalized;  liquidity has not been a major issue and the credit goes to our regulator the Nepal Rastra Bank in the manner our Industry has been developed. The question now is how Banks will deploy balance sheet to kickstart and help grow the economy again. The performance in the last fiscal year was more reliant on a pre-COVID business momentum, which was business-as-usual in normal times. The impact was seen to be muted largely due to the fact that lockdown effects were recorded only for the last 3 months of the fiscal year which ended mid-July 2020. However, the impact of Covid-19 is being felt since the fourth quarter of the last fiscal year. Fourth quarter results of banks do reflect this. We can expect to see the impact manifesting in the new fiscal year depending on how the economy evolves until Mid-2021.

Around a couple of years ago, the article-IV IMF mission to Nepal has, in its report, suspected ever greening problem in some of the BFIs. Some even say the BFIs doctor their balance sheets. Could these be some of the reasons for the less than expected impact on the BFIs balance sheets of the last fiscal year, what is your opinion?

Given the prevailing regulatory and supervision regime, the likelihood of such practices continuing is minimal. The reason behind BFI balance sheets not showing a significant impact, is given the business performance of the previous year being driven by a Pre-COVID Business momentum as mentioned earlier.  That said, the scenario in the Banking sector has changed compared to 2019, indicators are different now as economic conditions have changed with COVID and continue to evolve– moreover there have been various regulatory changes under the Directives released recently.  These changes are important to consider when having this view. 

Nepali BFIs have been often blamed for earning good profits even during the year, when the country witnessed lower economic growth. Is there any relation between the economic growth of a country and profits of BFIs? Or is the relation negligible in the small economies like Nepal?

Let us take ourselves back to early March this year. The situation was entirely different. There was significant demand for credit fueling growth, banks were scrambling for deposits, demand was growing, fueling consumption. The performance of BFIs are reflected till the third quarter of the last fiscal year. The situation now has taken a dramatic turn, effect of a subdued economic activity now being seen in the bank balance sheets may be lagged due to the nature of banking products, which have long actuarial life cycles. Expected impacts, if seen next year, are likely to be slower revenue growth rates, operating profits, and slow offtake in Lending. The actual impact of the Pandemic will only be felt starting now and in the next 8 to 9 months.

Generally speaking, the relationship between economic growth of a country and profits of BFIs has been a long standing academic debate that has various arguments depending on various factors and models. Different aspects normally considered when trying to study the relation include the degree of competition, industry cost efficiency, credit risk, sophistication of Financial sector products, the ability of the Financial sector in being able to hedge against economic growth cycles, tax complexities and market structures.. However, for a country like Nepal, the general answer could be that the real economic growth that has a direct impact on Bank profits through the channel of credit demand impacting Interest Income’s since the structure of the Banking Sector in Nepal has minimal reliance on complex Financial Instruments that may hedge such shocks. This is also why Counter Cyclical buffers have been introduced in our regulations, this has come after much research and evidence, to stabilize the impact for Nepal’s Banking Industry.

The central bank of Nepal has been encouraging merger and acquisitions (M&A) lately. Some of them have merged and others have acquired as well. Is there any formula that a certain size of economy should have this many number of BFIs? How many BFIs should an economy like Nepal have? What determines the number of BFIs?

There is no straightforward answer or any formula for this.  That said, issues like Financial Inclusion, Capital Adequacy, Risk Management and Digitization are also very important.  At the end of the day, each Bank has to be financially viable, supported by stable policies under the regulatory regime it operates.    Traditional arguments for BFIs have been based on economies of scale and synergy. However, there are various perspectives on optimal number of banks ranging from “Optimized Mathematical Game Theory Model results” to arguments incorporating the returns in a market, efficiency in the Industry, quality of assets and an economic general equilibrium. These traditional models however miss the current trends of digitization and new trends in the economy which may have different implications to the debate. We are excited to see how the existing arguments will change in light of these new developments.

It has been said that there is currently unfair competition among the BFIs due to liquidity surplus because of lack of investment opportunity during the COVID-19 crisis. What do you think, are there really unfair competitions among the BFIs on interest rates, and clientele snatching?

Yes, there is a situation of surplus liquidity in the system.  It is but natural for price to come down in a situation of excess supply – hence, the lending rates have fallen as the demand for assets remains subdued. That said, it is prudent to cover significant portion of this cost by way of a Base Rate.  If the demand for risk assets does not rise, then Deposit rate could fall further. We think the banking sector in Nepal is still evolving and is in the process of introducing various global best practices including policies around fair competition. Our Regulator continues to drive good governance in Banks. One expects international best practices related to Competition Economics to further develop on the back of policy discussions in Nepal given the maturity our Banking Sector and as the financial sector becomes more diversified. We have historically seen many International best practices in Nepal’s Banking Sector being developed through a similar discussion processes including KYC, AML/CFT practices. In all of this Standard Chartered Bank as Nepal’s only International Bank, has taken lead to develop the Banking Industry and work closely with NRB.

The Unified Directives released by the central bank on Tuesday has amended some of the provisions of interest rates and related to CEOs, some of the bankers have blamed Nepal Rastra Bank (NRB) for micromanaging BFIs and backtracking from its policy, how do you look at it?

We feel the policy formulation process is not easy in challenging times such as these when there are several dynamic variables and the market situation is dynamic. The current set of revisions have come at a time when Nepal and the world is facing a situation hitherto unknown.  We are all trying to assess the varying degree of impact COVID-19 is having on different segments of the Economy and the duration of this impact.  We are confident with the resources available to Nepal Rastra Bank, the revisions have come in keeping the larger interest of the overall Economy in mind and relief to the consumers. What continues to be encouraging in Nepal is the process of dialogue between Banks and NRB. 

In your experience, which are some of the countries where the central bank micro manages the BFIs? Will micro managing the BFIs help financial intermediaries?

The approach of central bank, while a bit different in each of the countries that I have worked in, fundamentally remains the same as priorities are always aligned to the macro situation or requirements in that particular country. One has always found actions of the Central Bank in the interest of the industry and the stakeholders.  Micro-management is a matter of perception. Having said that, I would like to draw a parallel to one of my favorite quotes of the Economist Daren Acemoglu from the book “Why Nations Fail”:  “Economic growth and technological change are accompanied by what the great economist Joseph Schumpeter called creative destruction. They replace the old with the new. New sectors attract resources away from old ones. New firms take business away from established ones. New technologies make existing skills and machines obsolete.” I would add one more line to this quote – “new situations (COVID in our case) make existing policies obsolete”. 

Standard Chartered Bank has been in Nepal for almost two-and-a-half decades now, how and what is its contribution to Nepal’s economy?

Serving the country for over 3 decades, we have a very strong commitment to Nepal’s economic development as the only International Bank in the Country. Our biggest strength continues to be our International Network and our ability to represent Nepal internationally and bring the International Financial Markets to Nepal including FDI. Our participation model in Nepal is different and our Purpose in Nepal besides driving commerce, spreading prosperity also includes how we have over the years developed Nepal’s Banking Industry. We are the Banker to the Banks, we are Nepal’s true Brand Ambassador internationally being one of the oldest Foreign Investors in this country. Our recently being  appointed as the Ratings Advisor for Nepal’s debut Sovereign Credit Rating is a testimony to our understanding and deep involvement in this market.

What are the plans of Standard Chartered Bank Nepal, during pandemic and post-pandemic?

Our learnings during the pandemic which also includes our experience across the various markets we serve, has already led us to think a new Operating Model going forward. The new Normal is going to be very different and that is a given. Digitization, new ways of working, client behaviors, the emergence of new sectors are many areas we are now thinking about and are moving towards. The pandemic has shown a very different client behavior and consumption patterns are likely to change in a post COVID world. Our focus in Nepal also in this pandemic continues to be how we support our communities, latest testament being support of over Rs 5.6 crores for immediate COVID Relief in Nepal through various implementing partners. The Health and safety for our employees and customers will continue to be top most priority and how we continue to serve them better is a major focus assuming that COVID is just the start of a change as the World is likely to see in the future.

Finally, what are your suggestions for the central bank as a regulatory authority of BFIs, and government’s financial advisor, it should do to protect the BFIs, and also the overall economy in such a tragic situation?

The Central Bank, does provide a framework to protect the interests of all participants of the financial industry. To this end, it should create a level playing field for the BFIs.  The interest of depositors, borrowers as well as investors should be safe guarded.  This is like a fiduciary role.  As a Bank we play a major role in economic development, albeit in developing countries some amount of guidance may be necessary in technical areas.

As an advisor on sovereign ratings, there should be a clear Nepal agenda and longer term vision and a plan towards execution. We need to work towards achieving greater transparency at all levels.  This will allow for effective policy interventions.  Moreover, we live in a digital era where data, information and analytics is already the way of life.  We need to be plugged into the world.  The better we are able to position Nepal, better will it be for economic development. Leaning too much on any segment of stakeholder for the benefit of other participants is not a sustainable model. Government, individuals, society, businesses, financial institutions all must take ownership so that we can collectively ride out the economic impacts of COVID-19.