'Some people will have to take a hit for real estate market to correct'
Joseph Silvanus is the CEO of Standard Chartered Bank Nepal. A banker for 18 years, Silvanus previously served as the country head of StanChart in Afghanistan. He has also been the bank’s regional head of development organizations for South Asia. In an interview with Rupak D Sharma of Republica, he discussed at length about the bank’s experience in Nepal, problems faced by the realty sector and relief package introduced by the government for the financial sector. Excerpts:
StanChart is the pioneer in consumer finance in Nepal. How has the bank’s experience been over the years?
We are a large player in the country’s consumer finance sector. However, the concept of consumer lending began only a decade ago in Nepal. So, you cannot call it a very mature market. Yet our performance has been outstanding as we have a programmed approach to retail banking, and every consumer product, like auto loans or personal loans, has separate underwriting standard. Since our credit assessment norms are very stringent, we have consciously introduced unsecured products like personal loans under which credit is issued without any guarantee or collateral, which is considered highly risky in the market.
So how do you keep things under control when dealing with unsecured loans?
To be a good credit evaluator, you need to have good mechanism to track the end use of credit and ensure the loan amount is not being used for speculative purposes. We have specialized staff who engage with clients to ensure they do not fail to meet commitments of repaying the loan amount. So, our focus is not only on credit assessment, but also on account maintenance and recovery process. That’s why, we are able to channelize most of the funds back into the system.
StanChart is known to be a conservative lender. And, you also maintain a statutory liquidity ratio of over 30 percent as against the regulator’s requirement of 15 percent, even when yields on government securities have gone down to less than a percent. What are the reasons?
We have been cautious because of downturn in the credit environment. In such a situation, where do you keep the money, as idle cash on balance sheets gives you no return. That’s why our SLR investments have gone up. But if you recall the incident in 2008, during which the financial tsunami hit western institutions, one of the banks that emerged unscathed was Standard Chartered. This was because of our stringent risk management measures. We believe banking is all about planning for the unexpected and there should be no surprises. And, we do not allow events to take over our strategy.
How did the company fare financially in the first six months of current fiscal year?
I cannot give you the figures now as the results are yet to be published. But we did well in the second quarter as well though in certain areas we have seen deceleration of growth. This is because the credit market has remained sluggish while banks are flush with liquidity. Even in consumer finance, growth has remained sluggish as people are staying away from purchase of capital goods and high involvement products, such as cars. The consumer sentiment is low because of feeling of insecurity generated by sluggish real estate market.
But there are claims many are shying away from borrowing because of high credit rates.
In Nepal, the cost of credit, from people’s perspective, may seem high. But in a country which does not have inherent sovereign rating and where no one knows the cost of doing business or cost of capital, the cost of consumer credit will remain expensive for some time. Besides, borrowers also need to display better behavior and should not forget what their payment commitments and capabilities are.
Does this apply to people who are securing personal home loans as well?
There is some stress in the mortgage market as well, although I cannot give you figures on this. However, our mortgage portfolio is well under control.
How do you think the central bank’s decision to raise the home loan threshold to Rs 10 million will benefit the banking sector?
It wouldn’t make much difference to us but the central bank’s decision to stand in the gap and create a level playing field for all financial institutions should be appreciated. However, regulations alone do not bring changes in the market. That’s why borrowers need to evaluate their ability to pay back loans in a sustainable manner prior to securing credit. They should not look for shortcuts to accumulate excessive capital.
What do you think of the entire relief package introduced by the government for the financial sector, which included extension of period to bring down exposure to realty sector?
The intention of the government was very good. But again a regulation is not a magic wand. The loans issued to the real estate sector are huge and correction do not take place in market overnight. The situation in the realty market will improve only if deals take place. But again how can deals take place when either the price of the asset is overvalued or the projected cash flow from the asset is not realistic. That’s why, it is important that some people take a hit. At the same time, it is also important that we focus on re-energizing the real estate sector. Deducting taxes on interest payment is one measure. The government should also think of extending tax rebates or tax holidays to those who want to invest in real estate