By Neeraj Man Sainju
For any customers whether institutional or individual, every bank runs its Know Your Customers (KYC) process to prevent itself from being an agent for Money Laundering. Likewise, customers should also learn how to prevent their hard earned money from problematic banks. Customer should learn to make some assessments for the banks. I prefer to call this ‘Know Your Bank†(KYB) - Project for customers.
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The financial institutions (FIs) in Nepal have flourished not just in numbers but also in their services, products and client base. Investment Opportunities by FIs come in the form of deposits - fixed deposits, recurring deposits, mutual funds and bonds. But there is no “Know Your Bank†process run by the customers before they enter into investment opportunities created by FIs. Customers either deposit/invest their earnings on the basis of what can be called Personal In Touch Marketing or with the interest to earn high return in a short span of time. Yes, of course, there are some institutions in Nepal which give a second thought before depositing their excess funds in a bank. Though they have their own way of “Know Your Bank†process, but the fact still remains that they analyze it with minimum standard (ignoring some exceptions).
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All of us are aware of the present financial scenario of Nepal's market: where it had been and how it went through so far. The greed of earning beyond what is logical and the unfair competition among the banks has badly affected the FIs’ credibility. To some extent this is true also across the globe. The non-resident Nepalis (NRN) and all those working outside the country have started doubting whether their earnings will be secured if transferred to banks in Nepal. All are on a wait and watch mode to know which FIs is next to be troubled or declared as problematic by the authorities. Daily newspapers are publishing negative news of FIs creating panic in the financial market which will no doubt hit the banks adversely even if the situation is not deteriorating.
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This is obvious that one day such rumors and negative news shall trigger a bank run. Banks get problem when they face bank run. In Nepal people react based on newspaper analysis, rumors and negative publicity about FIs. Customers do not critically analyze if the news item has any validity and they panic fast, which badly affects the situation of FIs. I urge all the customers/investors not to follow the news blindly as such blindness troubles the whole FIs market. In fact, it is the customers who can protect the FIs from being bankrupt. There is an international saying: “Banks get bankrupt not because of bad loan but because of liquidity problem.†This is what Nepal's banking industry is exactly facing now.
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Now critically analyse above mentioned criteria and ask yourself whether you are satisfied with the bank’s performance or if you still want to take a chance for better return.
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Is this just the beginning of banking problems?
Banking has become highly sophisticated. Changes are taking place in the banking environment around us each and every day. These changes have brought about risks and opportunities, which have direct bearing on the operation of the banks.
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As of previous years, while the economic indicators were on an improving trend, it did not reflect in improved investor confidence. Foreign investment has reduced to a trickle and domestic businesses have become very reserved of new capital investments.
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As can be seen, some banks in Nepal are going downhill, not to forget the global banking crisis. This is due to volatility in the banking business, wherein they are subjected to market failures arising from asymmetries of information. Mismanagement of credit operations, imprudent investment and lack of transparency in operation followed by inefficient supervision are the factors that may have led to the declining health of the financial institutions.
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Nevertheless, all customers should be aware of their investment, no matter where they bank. If it is just the beginning of the banking problems, “Know Your Bank†(KYB) is a must do process that customers should initiate to safeguard their investment. Rumours always surround us but actually knowing the facts on financial indicators is a major concern. If we all sincerely complete our “Know Your Bank†project, we can ensure our sound financial health and help towards checking any undesirable financial crisis arising from today’s market vulnerability.
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A list of recommendations: How to check on the safety level of your bank: Know Your Bank (KYB) – Project for Customers
* Check the Capital Adequacy Ratio of the Bank and compare this with the statutory level prescribed by Nepal Rastra Bank.
* Check the Assets Quality of the Bank:
* Total Loan Loss provision to Total Credit
* Non Performing Assets to Total Credit
* Contingent Liabilities to Total Assets
* Investment to Total Assets
* Loan and Advances to Total Assets
* Check the Management Quality (Judgmental) of the Bank:
* Market Coverage on Deposits
* Market Coverage on Credit
* Market Coverage on Investment
* Deposits Growth
* Assets Growth
* Cost to Income Ratio
* Cost of Deposits
* Earnings Per Share
* P/E Ratio
* Check Earning Quality of the Bank:
* Return on Net Worth
* Operating profit
* Net profit
* Interest Income to Total Income
* Fee Based Income to Total Income
* Go for Liquidity Quality of the Bank:
* Liquid Assets to Total Assets
* Cash and Bank Balances to Total Assets
* Investment in G-Sacs to Total deposits
* Cash Reserve Ratio (CRR)
* Credit To Deposits Ratio (CD ratio)
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(Sainju is Head-Treasury with NMB Bank.)
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