NEPAL BankPerformanceIndicatorsfor Nepal Bank Limited(NBL) and Rastriya Banijya Bank (RBB) Finance and Private Sector Unit South Asia Region February 15,2005 Introduction When the Nepal Financial Sector RestructuringProject (FSRP) was presented to the boardo f Directors o f the World Bank on March 9,2004, it was agreed that the project team update semi-annually the Performance Indicators established as benchmarks for measuringthe performance o f the two Management Teams which have beenplaced inthese two institutions. The primary function o f these Management Teams i s to restructure these banks and prepare them for privatization. This i s the first o f such reports to be furnishedto the Boardevery six months. The indicators are computed usingdata for the six-month periodendingmid-July2004. ChoiceofPerformanceIndicators The Bank and His Majesty Government o fNepal (HMGN) discussed at lengthwith the two management teams inNepal Bank Limited (NBL) and Rastriya BanijyaBank (RBB) the choice o f indicators to be usedfor monitoring and measuring the performance o f the two banks. Itwas decided, after extensive debate and brain-storming, to the following indicatorsbased on the following eight headings: 1. Debtrecovery 2. Business andrevenue growth indicators 3. Operating efficiency 4. Profitability 5. StaffEfficiency 6. Capital Fund 7. Computerization o f Branches 8. Disclosure Requirement The indicators used under eachheadingand their corresponding numbers are given inthe respective Tables for each bank. The following paragraphs summarize the keyresults achieved and present the project's assessment o f the performance o f the management ineach o f the two state-controlledbanks. A. NepalBankLimited(NBL) Debt recovery efforts havebeennoteworthy duringthe periodunder review. Against a NPArecovery target (incash) o f Rs. 2,125 million, NBLrealized Rs. 1,787 million- which represents 84 percent o f the target. Recovery from a few large defaulters didnot materialize as envisaged due to problems encounteredinthe judicial system-with court stay orders favoring the borrowers, and delaying the judicial process. However, the NPA level as a percentage o f the loan portfolio, declined to a better than expected 53.7 percent against a target o f 57.2 percent. A major reason for this was an increase inthe total loan portfolio. It may, however, be noted HMGNhas not hllyhonored NBLclaims under Government Guarantees nor met their promises to pay arrears inGovemment companies. The World Bank team i s working with the Government on this issue. Businessandrevenuegrowthindicatorshave generally beenachieved. The "good loan" portfolio increased by over Rsl.O billion-with new loans safely collateralized by National Saving Bonds (government) and commercial bank shares. A large inward flow o fremittances has also contributed to maintaining o f the deposits and to an increase incommission income. Interest earnings have also substantially improvedwith more performing loans inthe overall portfolio apart from collection o f interest on NPAs Most o f the operating efficiencyindicatorshave beenmet while some have been exceeded. Net interest spreads and margins have improvedas deposit rates have beenbrought inline withprevailing market realities. Net Operating income has been strengthened withbetter interest collections on loans, lower interest payments on deposits, and the consolidation o f assets. Overhead expenses, including staffcosts, have beenreduced significantly, with the implementation o f the VRS, contributing to a more efficient operation. Profitabilitytargets havebeenexceeded. Netprofits substantiallyincreased owingto better operating income and reduced expenses. There has been a major write-back o f provisions that were no longer required after the collection o f fully provided baddebts. Extraordinary income, mainly coming from the sale o f investments (particularly those in Standard CharteredBank shares ) has further boosted profitability - albeit on a one offbasis. The bank's Return on Assets i s now inline with that achieved byprivatelyoperated banks inNepal. Staffefficiency levels have improvedover FY2003 but fall short o fthe target set for FY2004. The staffrationalization process comprised implementation o f the VRS intwo phaseswithin FY 2004. Although the first phase o fthe VRS was very successful, the second phase was less so. As the anticipated overall staffreductiondidnot materialize within FY 2004, staff efficiency ratios interms o f Income were not achieved. However, staffcosts have been substantially reduced to meet the other cost ratios. The NetWorth ofthe bank,although still negative, improvedwith the target exceeded as a result of increasingly profitable operations. The General loan loss provisions increased with the increase innew PASS loans andrestructur;ed loans. The Specific loanloss provision, however, is less than projected- reflecting the reduction inthe NPA level and write-back o f loan loss provision following cash collection o f fully-provided loans and advances Computerizationhasbeensomewhat slower than anticipated due to delays inconducting a trial runo f new software inthe first branch. Data validation and (lack of) stafftraining have been major impediments to the rolling out o f the computerizationprogram. These issues are now being addressed and the bank is expected to have its 44 mainbranches computerizedby the second quarter, 2005. Disclosurerequirementshavebeenmet with audit o ffinancials beingcompletedwithin the scheduled the timeframe -both for audited (within5 months) and provisional (within 1month) financials. NepalBankLimited(NBL) Semi-AnnualPerformanceIndicators RsinMillions July July July Jan July Jan July Jan 2003 2004 2004 2005 2005 2006 2006 2007 Actual Target Actual Target Target Target Target Target DebtRecoveries NPA Level a. Actual 11,071 9,558 9,640 8,554 7,198 6,228 5,008 4,257 b. Less Uncollectible (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) Balance o fNPA (collectible) 7,571 6,058 6,140 5,054 3,698 2,728 1,508 757 c. As % of Gross Loans 41.7% 36.3% 34.2% 31.0% 23.5% 17.6% 9.9% 4.9% d. As % o f Gross Collectible 51.7% 45.9% 42.5% 39.5% 30.2% 22.8% 12.9% 6.4% e. Total NPNTotal Loans 61.1% 57.2% 53.7% 52.5% 45.7% 40.2% 32.9% 27.9% Recovery o fNon-Performing Debt inCash:- a. Principal 1,788 1,513 1,225 804 1,156 770 1,020 55 1 b. Interest 588 615 562 272 408 234 333 135 BusinessJRevenueGrowth a. Good Loans (Pass) 7,061 7,149 8,298 7,749 8,549 9,249 10,199 10,999 b. Net Interest Income 737 879 918 430 1,021 450 1,035 409 c. Non-Funded Income 338 302 406 170 392 225 505 255 d. Deposits 35,014 35,225 35,735 35,500 35,800 36,100 36,400 36,700 e. Non-Interest Bearing Deposit as a % o f Total D 14.3 % 13.9% 16.0% 14.1% 14.2% 14.4% 14.6% 14.7% OperatingEfficiency a. Net Spread 2.7% 3.0% 3.0% 4.4% 5.6% 5.0% 6.2% 4.8% b. NetInterest Margin 2.5% 3.0% 3.0% 0.6% 1.1% 0.8% 1.1% 0.6% c. Net Operating Income to 2.7% 2.9% 3.2% 7.0% 7.8% 7.2% 7.8% 6.8% Total Assets d. Cost to Income Ratio 110% 77% 69% 73.2% 62.1% 69.6% 61.0% 76.1% Profitabilitv a. NPBT (before 280 1,283 1,600 186 1,578 904 2,337 781 Extraordinary Items) b. Return on Assets -0.6% 0.3% 1.8% 0.8% 3.3% 4.2% 4.5% 3.4% Staff Efficiency a. Staffing Level 5,269 3,113 3,813 3,113 3,126 3,126 3,100 3,100 b. Income per Staff 0.5 1 0.72 0.62 0.68 0.74 0.72 0.79 0.72 c. Staff Expense to Income 38% 30% 27% 30% 27% 31% 28% 34% d. Staff Cost as a % o f Total 36% 35% 34% 35% 35% 37% 37% 39% I Operating Cost Capital Fund I a. Networth (9,830) (9,727) (9,015) (8,669) (7,422) ( 6 5 18) (5,421) (4,640) b. GeneralLoanLoss 71 71 208 77 85 92 102 110 I Provisions Computerizationof Branches :overing % o f total a. Deposits 49% NA 78% 85% 85% b. Loans 42% NA 81% 84% 84% DisclosureReauirement a. Annual Audit statementby 5 month 5 month --- 4 month -_- b. Quarterly Provisional by 5 month Imonth 1month 1 month 1month 2 weeks Note: January figures are six-monthly targets and July figures are annual targets. B. Rastriya Banijya Bank (RBB) DebtRecovery was substantial duringthe periodunderreview-at aroundRs 3.O billion. Nonetheless, while RBB exceeded its target inrecovering cash from delinquent borrowers (principal and interest), the projectedreduction inNPA was not achieved as some o f the good portfolio deterioratedinto substandard category. Judicial intervention by way o f interimstay orders favoring large delinquent borrowers, a deteriorating law and order situation inthe country resultingina reducednet worth o f borrowers, and a lack o f efficient and skilled manpower have been serious impediments to debt recovery. The NPA level as a percent o f the total loanportfolio stood at 56 percent against a target o f 52 percent (but considerablybetter than the 60 percent figure 12months earlier). The results for businessand revenue growthtargets are mixed. The lending portfolio (good assets) was short o f the target level due to a scaling back o fnew lending ina market that has a lower demand for credit -and where good lending opportunities are few. However, Net Interest Income exceeded the target, due to a reductioninthe cost o f funds (emanating from a significant loweringo f interest rates on deposits). Whereas the deposit mix (non-interest bearing deposits as a share of total deposits) has improvedcompared to the previous year, the transfer o f the staffretirement fund into savings deposits meant that the bank was unable to reachthe target set for non-interest bearing deposits. Results pertaining to OperatingEfficiencyindicatorshave been largely on target. The Net Spread and Interest Margin are both well above targets -and significantly higher than the very low levels that they hadbeen 12months earlier (negative inthe case o fnet interest margin). Net Operating Income to Total Assets, however, was slightly below target due to lower than expected income from fees and commissions (non-interest income). Nevertheless, effective budgetary control over costs have helped the bank exceed its targeted cost to income ratio. All o f these operating efficiency indicators represent a substantial improvement over the situation prevailing in the proceeding year. Profitabilitytargetshavebeenachieved, signifyinga complete turnaround fiom the massive losses (negative Rs.4.8 billion) incurred inthe previous year. Indeed, this was the first time that the bank had made a profit over the past eight years. Major factors that contributed to a goodbottomline included a reduction inthe cost o f funds, strong budgetary control inmanaging costs, and reasonably good debt recovery. As a result, the Return on Asset i s now inline with the industryaverage. The target set for staff rationalization didnot materialize due to a delay inthe implementation o fthe second phase o f the Voluntary Retirement Scheme (VRS 11). Moreover, investigations into the credentials o fretiring staff (relating to fake educational certificates) further delayed the retirement process -as these cases hadbeenreferred to the Corruption Authority for investigation andno action could be taken untilthey had completed their review. Although staffefficiency levels have significantly improved compared to previous years, they fell short o f target. Whilst the NetWorth of the Bankcontinues to be highlynegative, there has been a significant improvement from the previous year -andthe target was exceeded. The Computerizationprocess has been adversely impacted by un-anticipated delays inthe procurement process. The problemi s beingaddressed and it i s expected that more branches will be computerized by the time the second semi-annualreport i s submitted to the Board. Disclosurerequirementshave beenpartiallymet. The audit o fthe annual financial statements was delayed due to the late appointment (by the Office o f the Auditor General) o f statutory auditors. However, un-audited(provisional) financials were publishedon schedule. Rastriya Banijya Bank (RBB) Semi-Annual Performance Indicators ;. InMillit S July July July Jan July Jan July Jan 2003 2004 2004 2005 2005 2006 2006 2007 Actual Target Actual" Target Target Target Target Target 1 DebtRecoveries NPA Level a. Actual 16,005 13,520 14,049 13,260 12,240 11,080 10,200 9,270 b. As % of Gross Loans 60 52 56 52 48 44 40 36 RecoveryofNon-PerformingDebtin Cash:- c. Principal 7: 1,500 1,813 750 1,500 600 1,200 500 - d. Interest 488 1,000 1,125 500 1,000 400 800 200 2 BusinessRevenueGrowth a. GoodLoans (Pass) 10,604 12,410 11,038 12,240 13,260 14,420 15,300 16,480 b. Net InterestIncome (58) 745 799 578 1,290 712 1,456 786 c. Non-FundedIncome 305 708 532 270 537 286 567 308 d. Deposits 39,402 40,080 40,716 40,750 40,500 40,500 40,500 40,750 e. Non-InterestBearing 12.5% 14.0% 13.5% 14.4% 14.8% 15.4% 15.4% 16.3% - Deposit as a%ofTotalD 3 OperatingEfficiency a. Net Spread 0.90% 3.3% 3.74% 4.63% 4.54% 4.81% 4.84% 5.11% b. NetInterestMargin -0.18% 2.4% 2.65% 2.53% 2.77% 3.00% 2.99% 3.13% c. NetOperatingIncometo 0.55% 2.9% 2.68% 3.64% 3.87% 4.17% 4.13% 4.32% TotalAssets - d. Cost to IncomeRatio 1455% 83% 79% 66% 62% 62% 59% 58% 4 Profitability a. NPBT(before (4,839) 1,000 1,311 1,075 2,074 1,200 2,500 1,325 ExtraordinaryItems) b. Retumon Assets(annua1) -11.03% 2.5% 2.9% 4.70% 4.46% 5.05% 5.14% 5.27% 5 StaffEfficiency a. StaffingLevel 5,402 3,822 3,996 3,741 3,313 3,378 3,443 3,596 b. Incomeper Staff 0.38 0.8 0.70 0.37 0.86 0.43 0.84 0.42 c. Incometo StaffExpense 0.7 % 4.3% 4.1% 3.8% 3.8% 3.5% 3.7% 3.7% d. Staff Cost as a% o f Total 58.0% 27.6% 28.7% 33.7% 34.6% 38.8% 37.8% 38.7% - OperatingCost 5 CapitalFund a. Networth (22,392) (21,382) (21,28 1) (20,282) (19,284) (18,083) (16,784) (15,460) b. General LoanLoss 98 411 411 600 792 850 958 1,000 5- Computerization of Branches Provisions :overing % oftotal a. Deposits 40% 42% 42 % 76% 79% 82% 85% 87% - b. Loans 7% 35% 7 % 40% 80% 83% 86% 88% 7 3isclosureRequirement a. Annual Audit statement by 5 NA _-- 4 months --- 4 month --- b. QuarterlyProvisionalby 5 months months 1month 1month 1month 2 weeks 2 weeks 2 weeks - 1month Note: 1. January figures are for six months, July figures are annual. 2. Actualfigures for July 2004 arenot audited. (The RBBBoardhasrepliedto the preliminaryaudit reportand submittedthe signed annual accounts to the StatutoryAuditors).