Suman Joshi is the Founder and Managing Partner of True North Associates, a private equity general investment capital company. He has also served as CEO and Director of Laxmi Bank for three consecutive tenures during which he conceived, managed and scaled various projects and subsidiaries for the bank. He was also Co-Founder of Finaccess Pvt. Ltd.
Joshi has been a professional banker since 1990 and has completed tenures in various international and national banks in India and Nepal. He specialises in strategic planning, credit risk management, human resources, organisational development, corporate governance, fund management, and mobile financial services. He received the Harvard Business School Executive Education Program on Private Equity and Venture Capital in 2013.
In an interview with Business 360, Joshi points his laser sharp focus on the current banking system and the future of private equity to foster entrepreneurship in the country.
As a professional banker since 1990 and having worked in India and Nepal, what are your views of the banking sector since you left it in 2014. What have been the major hits and misses in the sector?
The banking sector had an excellent start in the late 80s and 90s when the space reopened with three international banks coming in. The quality of skills and expertise that they were able to bring into the country was at par with any international banking standard. Those of us who were fortunate to have worked in those joint venture banks were able to acquire a lot of international exposure, perspective and therefore the standards that we went on to set after we moved out of the joint venture banks initially were, I would like to say, pretty good. For example, many of the banks today are headed by people who worked with one of these three joint venture banks. So in terms of skill transfer that phase was absolutely spot on. Having said that, visible signs of the struggle to maintain the level of quality were evident before 2012, which was basically because of rapid growth in the banking sector which was actually amplified after the diktat from Nepal Rastra Bank where banks were asked to raise capital multifold.
The banking sector is such that it’s not always necessary to tell your banks what level of capital they need to have because the international norms dictate that your capital relates to your size of the business, and therefore you always maintain that. But here, it was an attempt to basically force a significant amount of capital which was not commensurate with the kind of business that was to be had. So, that has been a trigger – in fact, a major trigger.
Over the last 3-4 years, a number of not-so-good developments have been seen in the banking sector like banks being too aggressive, lot of issues with respect to quality of business that they do and also the quality of managers that are coming up. Rapid growth would provide a lot of opportunities but then you need to have people who have gained sufficient knowledge and significant capability to fill those positions; however, that is something that has not happened. Therefore you see a lot of operational risk issues, frauds and stuff like that. Not to forget, aggressive lending behaviour, and most importantly the liquidity crunch—the credit crunch that we experienced.
We have been doing that year in and year out and that has had an impact on the entire economy and it is not just to do with the banking sector because if banks cannot lend, the economy takes a hit in more ways than one. So, there are issues that we need to address very quickly. I believe one way of doing that is to try and reduce the number of banks. But this time around, it should not be on the basis of the size of the capital because size of the capital is usually determined by the size of the business. There could be banks which could choose to stay small, and therefore they do not need eight billion rupees. We have tried to impose that level of capital on everybody and therefore even if they do not have sufficient capability to move up to that size and business, they are trying to do that and therefore mishaps happen.
So this time around when we try to reduce the number of banks, let’s not look at the size of the capital. Let’s identify 5-6 anchor banks which are strong, and let’s have them acquire some of the smaller ones, because some of the smaller ones are now struggling to stay relevant. So, before big accidents happen, it’s important that we take this step. And the central bank in any market would have the mandate to push the market in this direction. They don’t necessarily have to issue directives but they have every authority to basically move the market in this direction.
Do you think it is safe to say that the ‘merge and acquisition’ of banks has been a debacle?
It’s too early to say but if you look at some of the anomalies and issues that have come about, I would say, it has not been completely successful. It is because of the cultural integration issues even within the merged organisations that keep emerging time to time.
But more importantly, the reason for holding such a view is because of our provisions in terms of identifying bad assets. The regulation in Nepal is rudimentary. If you apply international standards, our portion of bad assets would look humongous as opposed to what has been reported. See, there is a sense of protection here. If you take that protection away, and at some point you need to do that if you want to integrate with regional and global market—so if we do that our banks are exposed—quite badly.
However, I am happy to see discussions on reducing the number of banks gaining momentum. When we move in that direction, I would like the authorities to create following possibilities, among others, in tandem:
- Bank boards must comprise of experienced professionals who are appropriately compensated.
- Central Bank should induct a third Deputy Governor from among commercial bankers. This will better align regulators’ and banks’ perspective going forward.
- Asset recognition standards must be improved to gradually meet international best practices, i.e., to better reflect cash-flow-linked probability of default of an underlying asset.
- Large Nepali banks should think regional. Markets like Combodia, Myanmar, Laos etc could benefit from our banking journey and expertise. This will also help Nepal integrate better with the global economy.
You have been credited with the launch of the first mobile payment system in Nepal. Tell us what led to it…
When I was heading Laxmi Bank, we positioned ourselves as the bank which is innovative and open to adopting new technologies, so it was a natural step forward for us to adopt mobile banking which was an emerging phenomenon all over the world. So timing wise, I don’t think we were too early, we were right bang on time, but the trouble we had with our initiative then and even now, to some extent, is that our market was perhaps not ready for that on a number of accounts.
The first obstruction was posed by the lack of proper infrastructure. Mobile banking depends on network providers and power situation. Back then network providers were not as big or good as they are now. And the power situation was poor. When we went out to the market for demos, it turned out there is no power and the network provision was not there. So it didn’t take off the way it should have.
Secondly, business like mobile banking requires a lot of investment from everybody—all stakeholders, in terms of building the ecosystem. The ecosystem does not only involve banks but also agents, network providers, and then people in the villages. The entire chain needs to be covered and to do that a lot of investment is required. And investment was not adequate then and it is not adequate still. There are a few players but we have not reached the level we should have.
Thirdly, our regulators are, perhaps, way behind in understanding and appreciating this particular space. The regulator is still lagging behind the private sector initiatives. They don’t have a full appreciation of what this technology can do. I mean there are broad remarks made on the need for digital banking and expansion of digital banking but then if you look at the policies and their actions, they do not match.
The private sector is ahead of the regulators but they cannot do much until regulations are in place. So these are a few things that have impeded growth.
What became of Finaccess and Hello Paisa?
Hello Paisa could not sustain because the size of the business was not enough. Hello Paisa as a concept, as a platform was conceived after deep research and exercise of 2-3 years and that is still the only interoperable platform there is but then they could not sustain because the size of the business was not adequate and then the ecosystem on the investment part was not enough for it to sustain.
Why did you part ways with banking sector after actively participating in it for 24 years?
There came a point where we were not leading the sector the way it should have been and then came the disruptive diktat for capital – multifold capital increase. And then I had done my bit. Twenty four years out of which three terms with one bank, and also I didn’t see how I could add value anymore because you can do things to yourself but banking is such that the entire industry needs to be at a certain level if you want to keep performing, if you want to keep doing well. You cannot do it single-handedly. So I thought to myself — it is not possible for now. Let me take a step back and try something new which is also kind of associated with the financial sector. If I can open up this space, it will complement banking to some extent and hopefully will help the banking sector. And that led to the genesis of True North Associates.
Let’s talk about True North Associates (TNA). What does the present offer private equity firms and how does the future look for them?
TNA is a private equity general investment capital company. Private equity is still at a nascent stage in Nepal. There are no regulations to identify and acknowledge private equity as a separate asset class. It’s actually almost funny and surprising that in Nepal it’s like this because if you look at any vibrant economy all over the world, private equity is one of the key engines of growth. But for some reasons we have not done that in Nepal.
Our financial system is heavily skewed toward banking and the loans that we take from banks; people don’t have access to any other kind of capital here. But if you look everywhere else; for example the US, which is the father of private equity; you just need to have an idea and you can access capital from the market.
You cannot tap into bank loan with a mere idea or at an early stage of your business because they will be very cognizant of the risks that they are taking; but then you can access other sources of capital in the market who are willing to take greater risks. So that is the space that needs to grow and that’s the reason why I thought I should give it a shot.
TNA was established in 2015 to develop the Private Equity and Venture Capital space in Nepal. It fosters entrepreneurial and economic development in Nepal by helping businesses become more structured, marketable, profitable and sustainable.
This is a new space; however, if we can work with stakeholders, the government and international community, it is possible that we sort of open up this space, learn from the mistakes we made in the banking sector, set a standard which is good enough and which is sustainable.
Private equity is led by the private sector therefore government’s role is almost limited to acknowledging this as an asset class, as a form of investment that a company can tap into which is different from a regular shareholder’s money. So once that differentiation is made, the private sector should be able to, sort of, take it forward.
We are working with the government; we are discussing a draft regulation on this but the progress has been kind of slow.
What led you to shake hands and sign a deal with One to Watch?
TNA is a private sector venture capital company and to get started we decided to focus on growth stage SMEs. We were beginning to build that kind of portfolio but realised that One to Watch, which is owned by a bunch of Dutch people with major activity with Nepalis, is also doing a similar job focused on SMEs. Since private equity is a space that is just beginning to open up in Nepal, we felt that there is no need to compete, and there is a lot of value in joining hands, and therefore we decided to acquire 49% of that company and to channel all our SME activity into that. So One to Watch now is a complete SME focused private equity company and whatever remains of True North will look at larger deals.
Why not bet on startups?
Startups as it is, 90% of them fail. Besides, Nepal’s business environment is hostile. To manage our risks, we decided to stay away from startups. Even the growth-stage companies that we work with, they require a lot of hand-holding, a lot of preparation before they become investment ready.
We could invest in large startups because they are usually promoted by people who have experience in business, they have track record. So large scale startup is something else.
This portfolio of ours, TNA and One to Watch put together, we have 18 companies now. TNA is my full time effort but I do engage in bits and pieces of corporate advising, I sit on boards of companies as an independent director, so I do all that personally but my focus is entirely on TNA, which is my full time commitment.
TNA invests into larger companies as well. Our interest is to invest private money as equity. Bifurcate that small portion to One to Watch and the rest is larger companies.
We are currently looking at an agro-warehousing company. And then there is Foodmandu; that’s our investment, that company is now ready to go for a round 2 fundraise. These are the types of companies which disrupt the market and once they gain some prominence it’s quite possible that we can join hands with international companies; for example, there are large food delivery companies in the world, they could want to get into the market – this is the kind of company they could acquire.
Sarathi, if they stay up and stay prominent, the likes of OLA, Uber could sort of consider acquiring them. That is the kind of strategy that we have and businesses that we invest in; they largely have disruptive business models – generally different from what you have seen so far and have the potential to change the landscape of whatever industry they operate in.
What about the duplication of ideas?
It really does not matter. Everybody can have ideas but people need to be able to execute those ideas and turn them into business. You have ideas, you have products and then you have business. We don’t invest at idea level; we don’t invest at product level either; we only invest at the business level. Business means you are geared to sell those products on an ongoing basis to up the scale. We get in and help businesses scale.
You let one of the prominent banks in Nepal and now you are leading TNA. Tell us your definition of leadership?
I think a lot of common sense. Leadership is not rocket science. It is common sense and your ability to work with people. And may be your ability to comprehend things that happen around you… if you are able to grasp that slightly earlier than the rest, then you envision something and you share it with your team and something happens.
Your advice for entrepreneurs and startups to make them investment ready…
They need to stay grounded. Young people are quite smart and intelligent. They have the capability but we operate in a country which is not perfect on many fronts so they should not emulate what they see in the western world. They should not expect it to work in Nepal. Having said that, they should not give up trying to change the way things are done here. To start with, keep your expectations realistic but use your energy to keep pushing.
Secondly, if you want investors like us to support your company, make sure you know what you are trying to do. More often than not, people come up with an idea or a product, most youngsters we have seen are obsessed with the product or idea, and they fall in love with that. Investment requires a business. Business means you have to find a way of monetising that product or idea. You have to be able to sell it in a sustainable manner so that it keeps generating money for you to keep going.
If it is just a product, not many investors will be interested. And also, entrepreneurs need to be capable of managing their finances. Money management is important if you want to be in business. You better know your money.
Thirdly, you need to understand how things happen here in terms of what are the processes of getting your company registered and taxation.
How does TNA work – do you find these companies or do they come to you?
We reach out to potentially interesting companies as well. We run a program called Business Accelerator for which we ask interested companies, those needing investment, to enroll into our program. Between One to Watch and us, we have run about seven of these programs, each program lasts for three months. So we screen them from thousands of applications, and we pick about 6-7 companies and put them in a room and spend three months with them: telling them the nuances of business, how HR should be managed, how legal aspects should be managed, how finance should be looked at, all those things are taught to them through a mentoring process, as well as through a panel of experts, and at the end of that program, they are then required to develop a complete presentation which is essentially a pitch to investors seeking investment.
Now that people know about us, we keep getting inquires on a daily basis. But our experience has been that may be one out of 20 possibilities convert into actual investment. It is not just about giving them the money; it is also about continuously advising them on how they should manage their growth.
Any books you recommend for young entrepreneurs…
Well, I am also looking for good books. I would recommend people to look up this new concept called ‘blockchain’. Blockchain is the next big thing.
A startup you see hope in…
An entrepreneur who has earned your respect
In fact, all entrepreneurs as they had the guts to try it out and for having taken that step. I have respect for all the entrepreneurs out there. Even when they fail. And failure is an important aspect of your entrepreneurial journey. Failure, most of the times, has to do with the youngness of the person. I don’t think anything is wrong with saying ‘it’s alright to fail’. If you don’t fail, fantastic, if you fail, don’t let that deter you.
Who do you draw inspiration from?
I draw inspiration from a lot of people. I have not personally met them but the likes of Jack Welch, the books that he writes, the philosophies that he has and how he managed General Electric (GE) over the years. So he would be one of my biggest influencers.