Anil Kumar Upadhyay was the CEO of Agriculture Development Bank Ltd till recently. He was also the president of the Nepal Bankers Association - the association of CEOs of commercial banks in the country till his retirement from ADBL CEO. New Business Age talked to Upadhyay a few days ago as he neared completion of his four-year term as the CEO of the government-owned Class ‘A’ bank. Excerpts:

You are also the president of Nepal Bankers Association (NBA). How is the banking sector now?
The banking sector is more transparent than other sectors of the country. It is working within the framework of the regulatory body, and has demonstrated strong governance and accountability. The sustainability of the banking sector is essential for continued economic growth in Nepal.

Banks have been seeing a shortage of loanable funds for last ten months or so. How long do you think it will continue?
Currently, Nepal's banking sector does not face a liquidity crisis. Previously, there was a contraction in the sector, but it was managed by making good use of monetary instruments of the central bank. Some banks are in a position to invest. But this doesn’t mean that all banks are in a comfortable situation.

Many distortions were seen in the financial sector due to a lack of loanable funds and contraction. What can be the reasons and solutions?
There are two main issues at play in Nepal's current economic situation. First, as an import-dependent economy with low exports, Nepal is reliant on external factors such as tourism and remittances. The country's banks and financial institutions are facing pressure due to external economic conditions, and the internal economic structure has been unable to absorb this pressure. This has made it difficult to manage resources. In order to address this situation, Nepal needs to either increase exports or take foreign loans, or find ways to earn foreign currency. However, these options have not been possible due to the economic impact of the pandemic. Balance of payment (BoP) can only be achieved if tourists come to the country or remittances come in. But since this could not happen, the entire economy was affected. We also discouraged investment by clamping restrictions on imports. Those were the reasons behind the crisis. I think the situation will ease gradually.

Banks went on a credit expansion spree after the COVID situation eased. Don’t you think the banking sector should be blamed for this crisis?
The banking sector in Nepal was impacted by the pandemic in the first two years. As far as credit expansion is concerned, banks did extend credit aggressively initially. But, I think it is necessary to see whether we strengthened the overall system during this period. We need to see whether the banks and financial institutions worked within the framework of the regulatory body and as guided by the monetary policy. It is also necessary to consider whether banks and financial institutions invested in priority sectors. As required by the central bank, approximately 35% of credit has been extended to the priority sector. Those failing to do so have been penalised by the central bank. From this perspective, it appears that the crisis may be more the result of policy rather than any fault on the part of the banks.

Earlier, there was unhealthy competition among banks while fixing interest rates. Now banks are working in unison to fix the rates. Do you think it will work?
Interest rates are determined by the market all over the world. In Nepal, the central bank provided refinancing to banks and also did not impose fines for rule violations during the pandemic. Demand was low at that time due to the pandemic. Banks were mobilising cheaper deposits. At that time, banks widened their scope of investment to cover the cost of deposits. This led to an aggressive expansion of loan investments. However, the situation has changed since then. For example, the lending rate was 12.13% in June 2019 and it is 12.19% at the moment. We were all happy with the loan interest rate at 12.13%. But by June, 2021, it came down to 8.43%. What I am trying to say is that we are comparing extraordinary situations with the normal situation. In June, 2022, the lending rate was at 11.62%, and it is now at 12.19%. A significant portion (42-46%) of total deposits at that time were high-cost ones, while today that number is closer to 58-60%. These rising costs have to be accounted for somehow. Similarly, the base rate has also increased from 9.57% in June 2019 to 10.34% today. The cost of deposits has also gone up from 6.60% to 8.16%. It is important to acknowledge that the expenses of banks and financial institutions have increased over this period, including operational costs and the cost of annual maintenance and software. Wages and salaries for bank employees also need to be increased when the government raises wages for workers, and the rising value of the dollar has also contributed to higher costs. If banks continue to adopt the principle of open market, the interest rate will increase even more. But the regulator has not given us permission to do that.

It is said that shortage of loanable funds is less chronic in government-owned banks compared to private sector banks. The interest rate is also low. Is it because the government has given many facilities to such banks?
It seems that you are referring to Rastriya Banijya Bank Ltd (RBBL), Nepal Bank Ltd (NBL), and Agricultural Development Bank Ltd (ADBL). These banks should not be lumped together as they each have their own unique characteristics and financial situations. For example, ADBL relies on its own resources and has around 1.7 million depositors. It has also started handling some government funds in recent years. In contrast, RBBL and NBL mostly handle government funds and they have lower loans and investments. NBL, in particular, was in the restructuring phase and did not aggressively invest initially, but it has become more active in recent years. At ADBL, we have a lower ratio of fixed deposits, while the number of depositors has been steadily increasing. To diversify our funding sources, we have signed agreements with various organisations and raised Rs 18 billion by issuing agricultural bonds.. We also took refinancing offered by the central bank. Likewise, we also sold our agricultural portfolio when we started seeing stress in our system. In contrast, private sector banks often rely on large investments and mobilise funds from the market which can result in higher-cost deposits and more expensive credit. Some of these banks have also started bringing in funds from foreign lenders. Some are trying energy and green bonds. Ultimately, both government and private sector banks are working in their own ways to meet their financial needs.

Banks are branching out to rural areas. How do you think it will impact our economy?
Over the past five years, the number of bank branches in Nepal has increased by 118%, from 2,318 to 5,074. Banks have now reached all 753 local units in the country. This rapid expansion has contributed to a 142% increase in bank deposits and a 64% expansion of credit. The use of ATM, internet banking, and mobile banking has also increased significantly. The government and central bank have pursued a policy of expanding bank branches through the bank extension model, and the Nepal Bankers Association (NBA) has worked to take bank branches to all local units in the country. However, this expansion has also increased the operating costs of banks. While these costs have risen, banks are facing challenges in growing their business and managing resources at the same rate. Nevertheless, banks do not have the option of reversing this expansion.

Can branch expansion alone support our economy?
An increase in banking activity can certainly support economic activities. While it may not be immediately profitable for a bank to open a new branch, the long-term benefits can be significant. For example, the ADBL has some branches that are still operating at a loss. But the expansion of bank services to local units can lead to increased economic activity, business growth, production growth, and new opportunities. It also makes it easier for people to access finance and deposit their money safely, and removes the need for them to travel to bank headquarters to retrieve remittances.

Do you think banks will benefit from such expansion unless people are financially literate?
Financial literacy is an important issue and requires collective efforts from all stakeholders, not just banks. It is not feasible for banks alone to reach every household. But it is possible by using different means of mass communication. To improve financial literacy and access to finance, and increase business opportunities, the policy of the government and local units should be supportive. It is possible to effectively address the issue of financial literacy and ensure that it is integrated into the educational system and supported by policies at all levels.

Please tell us about your branch network?
ADBL has branch offices in all 77 districts of Nepal and training centres at the province level. We have altogether 270 offices including the head office and corporate office. Some of these branches, particularly those in remote, hilly areas, have not been able to achieve expected levels of business in our 55-year history. The expenses there are similar to other branch offices, but business is very low. Despite this, ADBL feels a sense of social responsibility to maintain a presence in these areas, even if it is not profitable.

Do you think this policy of expanding branch network needs to be revisited?
The expansion of bank branches to all local units can be a positive development for the country, and the government should support such efforts. In the past, the government provided support for the operating costs of some branches in remote areas. However, if a branch is unable to achieve profitability or growth, it may not be sustainable for the bank to continue operating there. In these cases, it could be helpful for the local unit or province government to provide support, such as by opening accounts, managing resources, or promoting entrepreneurship. Now that banks have fulfilled their commitment to expand to all units of the country, it is important to focus on making these branches sustainable.

Why are banks failing to bring funds from the foreign market? Are there any legal or policy hurdles?
Cost is a major factor to consider when making investment decisions. Investors want to know how to enter and exit a market, as well as the potential return on their investment. Once they have invested, they will also consider factors such as the likelihood of business success, supportive policies, and the potential for achieving expected returns. Political instability and ongoing protests can be deterrents to investment in Nepal, as they create uncertainty and risk. In order to attract and retain investment, it is important for the country to have a stable and predictable business environment. One of the challenges that Nepal is facing is the lack of a country rating. Without a rating, investors may be hesitant to put their money in Nepal due to concerns about the potential cost risk. Additionally, the devaluation of the Nepali rupee against the US dollar, which has increased from Rs 118 to Rs 132 per dollar over the past three years, can also contribute to higher costs for investors and make Nepal less attractive as a destination for investment. Interest rates on funds borrowed from foreign lenders are often in the range of 10-12% which may not provide good returns on investment. In addition, global interest rates are also increasing, making it difficult to find cheap financing options.

The central bank has directed banks to extend nearly half of their credit to the agricultural sector. But it is not happening. What do you think are the reasons?
We are extending 26-27% of our total credit in priority areas. It will be around 34-35% if we add up everything. ADBL has disbursed a total of Rs 1.13 trillion to priority sectors, an increase from Rs 754 billion in June 2019. This growth has been made possible by operating within the guidelines and framework set by the regulatory body. In particular, the bank has increased its lending to the agricultural sector from Rs 346 billion in 2019 to Rs 589 billion, and to small and medium industries from Rs 262 billion in 2017 to Rs 448 billion in 2019. Credit to the energy sector has also increased to Rs 273 million in June 2022. Agriculture and energy are important sectors that should be supported by the government. In other countries, such as the US and Japan, the government provides subsidies and other support to the agriculture sector, recognizing its importance to the economy and society. In Nepal, however, the agriculture sector does not receive similar levels of support and is often faced with challenges such as small landholdings, traditional farming practices, and a lack of access to technology and markets. The energy sector also requires government protection, with banks currently providing financing for energy-based projects.

Isn’t it high time banks started working aggressively in the agriculture sector?
Banks, including the ADBL, are doing their part to support economic growth and development in sectors such as agriculture and energy. However, they cannot do it alone and need the support and cooperation of other stakeholders, including the government, local municipalities, and the private sector. The ADBL has taken a number of steps to support the agriculture sector, including providing entrepreneurship training, mobilising farmers through training centres, and cooperating with those in the energy and hydropower sectors. We have been helping to send young people to Israel, Thailand, and Bangladesh for entrepreneurship training. However, challenges such as the decline in domestic production and the migration of young people to foreign countries for work have led to an increase in imports and a decline in the farming profession.

Are the government-owned banks in merger talks?
We have seen some big mergers, and there are more in the works. As the CEO of ADBL, I am unable to comment on this topic as I was appointed by the board of directors. The ultimate decision on mergers lies with the government, which owns 51% of the stakes in ADBL and NBL and 99% in RBBL. While I believe the government will not weaken its delivery channel through a merger, I do see the possibility of one in the future as a way to increase capital size and expand into the international market. There are also alternative options such as increasing capital or issuing rights shares that could bring these banks to a new model and increase competitiveness in the commercial banking sector.

How is the bank’s performance in the agricultural sector?
The bank has been successful on this front in recent years. The government established the Agricultural Development Bank considering the need to support the agricultural sector in three ways. The aim of the bank is to provide access to credit to farmers, support other agricultural materials and equipment to farmers, and increase the capacity of farmers by training them and connecting them with the market. For this purpose, training centres have also been established in various province offices. To fulfil the same purpose, agricultural experts have been appointed as directors in all the province offices except the Kathmandu office. Earlier, the government used to provide us the budget for irrigation, fruit, vegetable cultivation, bio gas plant construction, among others. But it was discontinued after the country adopted an open market policy.

ADBL also started issuing credit cards for farmers. How is the performance?
It is in the piloting phase. We have started credit cards for farmers as well as a mobile application. So far, we have distributed 20,928 cards. The credit card is not yet available in all districts, as it is still being tested. The pilot programme is currently being implemented in the Madhesh, Lumbini, and Bagmati provinces through 30 offices, and we are seeing positive results so far.

Some are saying NRB is micromanaging banks. What policies do you think the central bank should take?
I welcome the policy adopted by the central bank to control unhealthy competition among banks. The central bank implemented these policies in order to address the liquidity crunch, and it is important to understand that these actions were taken with the best interests of the country in mind. It is the responsibility of both the central bank and all of us to work towards stabilising the situation and preventing it from deteriorating further. The central bank's primary goal is to maintain control during this crisis. Once the liquidity situation improves, the bank will review its policies again.

What do you think needs to be done to make agro insurance more effective in Nepal?
I think Nepal needs a proper agro insurance company. If existing insurance companies are to offer agri insurance policies, they should move forward with a different modality.

You are leaving ADBL very soon. How do you assess your performance?
When I assumed the office at ADBL four years ago, the bank had a total loan portfolio of Rs 103 billion. Today, our outstanding credit stands at Rs 178 billion. We have also expanded our agriculture portfolio to Rs 62 billion from Rs 15-16 billion. Likewise, we have become successful in raising deposits from Rs 113 billion to Rs 166 billion. In addition to increasing deposits, we emphasised on resource management by raising Rs 22 billion from the market through agricultural debentures. Likewise, non-performing loans have been brought to 1.68% from around 3-4%.

We also managed to hold annual general meetings of four years. We provided our shareholders an average dividend of 22.5% over these years. Likewise, our customer base has expanded to around 1.7 million from around 1.2 million. When I joined the bank, mobile banking was only starting to take off. Today we have around 500,000 mobile banking users. Internet banking users have also increased to around 11,000. We have distributed around 170,000 Visa debit cards. Likewise, the number of DMAT users has also grown. We have around 165,000 borrowers which is higher than the combined numbers of some banks. Profit is increasing, and so is the efficiency of the employees. We have introduced credit card, Kisan credit card, prepaid card, dollar card, online technology, facility of opening an account from abroad and many other facilities.