Integrated Reporting
The Integrated Report has been prepared in accordance with the International Framework issued by The International Integrated Reporting Council (IIRC).
ANNUAL INTEGRATED REPORT, FY 2022-23
OUR APPROACH TO INTEGRATED REPORT (IR)
We are pleased to present our second Integrated Report which has been prepared in accordance with the International Framework issued by The International Integrated Reporting Council (IIRC).
The purpose of this report is to explain to providers of financial capital how the Bank creates, preserves or erodes value over time. The report also benefits all stakeholders interested in the Bank’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers.
We have tried to keep this report brief, consistent and complete, including all material matters, both positive and negative in a fair way. This report ensures accurate data of the Bank’s operation, both financial and non-financial performance according to our strategic planning, mission and vision.
SCOPE AND BOUNDARIES OF THIS REPORT
Our Integrated Report covers the period from July 17, 2022 to July 16, 2023 by following the guidelines of Integrated Report issued by The International Integrated Reporting Council (IIRC) and concerns the operations of Siddhartha Bank Limited.
FORWARD LOOKING STATEMENTS
This report contains statements that relate to future operations and performance of the Bank. Actual results may differ materially from those suggested by such statements due to certain risks associated with our expectations with respect to, but not limited to, future circumstances such as technological changes, the impact of changes in banking regulations and other regulatory changes in the country, natural calamities, inflation, deflation, unanticipated fluctuation in interest rates, foreign exchange rates, equity prices or other rates or prices, the performance of the financial markets in Nepal and globally, among others.
ASSURANCE
For maintaining proper transparency, Siddhartha Bank has obtained combined assurance from both internal & external perspective.
MATERIALITY OF THE REPORT
The Bank has disclosed information about all matters that substantively affect the Bank’s ability to create value over the short, medium and long term. The Bank has disclosed both positive and negative matters, including risks and opportunities and favorable and unfavorable performance or prospects based on their materiality.
RESPONSIBILITY OVER
THE INTEGRITY OF THE INTEGRATED
REPORT
The Board and the Management of the Bank ensures that the Integrated Annual Report has been prepared pursuant to International Framework of the International Integrated Reporting Council (IIRC). The Board and the Management also ensures that reasonable care has been taken in the preparation and presentation of this Annual Integrated Report and addresses all material issues and make fair presentation on Bank’s integrated performance and its overall impact.
Integrated Report
1. ELEMENTS OF AN INTEGRATED REPORT
1.1. ORGANIZATIONAL OVERVIEW AND EXTERNAL ENVIRONMENT
Siddhartha Bank Limited (SBL) is a leading commercial bank in Nepal with an asset size of NPR 285.98 billion. The Bank has been positioning itself as a digital first, customer centric bank with focus on sustainability.
The Bank has an extensive network of branches, ATMs, branchless banking agents, and is committed to providing a one-stop financial solutions to meet the varied needs of its customers. The Bank is serving its customers through 196 branches (including 5 extension counters), 225 ATMs, 1,732 POS machines and 123 branchless banking locations.
The Bank is fully committed towards customer satisfaction and the range of modern banking Ownership of Subsidiary products and services that the Bank has been providing is an example to its commitment towards customer satisfaction.
The Bank has been able to gain significant trust of the customers and all other stakeholders to become one of the most promising commercial bank in the country.
Mission, Vision, Core Values and Code of Conduct
The mission, vision, core values and code of conduct have been presented in Siddhartha Bank at a Glance Section.
Principal Activities and Operations
The principal activities of the Bank are to provide full-fledged commercial banking services including agency services, trade finance services, card services and e-commerce products and services to its customers through its strategic business units, branches, extension counters, ATMs and network of agents.
1.1.1. External Environment
Competitive Landscape of Banking
Industry in Nepal
and Siddhartha Bank
Nepali banking industry is relatively stable with moderate to low threats, considering the analysis using the Porter’s five forces.
THREAT OF
COMPETITORS
- Large number of banks and financial institutions
- Low switching costs for customers
- Undifferentiated products and services
- High fixed costs of operations
- High exit barriers
THREAT OF
SUBSTITUTES
- Cooperatives increasing rapidly
- Unsystematic/ unbanked traditional sources of lending
- Mobile banking, e-wallets and other digital financial service providers
- Beginning of Private equity/venture capital market
- Increasing popularity of fintech startups.
THREAT OF
BUYERS
- Bargaining power of consumer is very high
- Large number of alternatives
- Low switching costs
- Full informationavailability of the banks
THREAT OF
SUPPLIERS
- Few dominant players in technology related supplier market, resulting in high bargaining power
- Low bargainig power for other suppliers
THREAT OF
COMPETITORS
- Licensing requirement from central bank
- Difficult for new entrants as banking industry is highly regulated
- Capital requirment is high
PESTEL ANALYSIS
The PESTEL analysis of the Nepali banking industry discusses how the political, economic, social, technological, environmental, and legal factors contribute to the banking business.
POLITICAL FACTORS
Banking is greatly affected by political factors in any country. Funds are mobilized more proficiently in a stable political environment. However, if the political environment is unstable, it might lead to create credit risks for the bank. Government regulations and foreign invest ment policy influences the operations and investment of banks in the country. Likewise, taxation policies are different of each government and changes in tax laws affect the Bank’s cost of doing business. In overall, political factors play a vital role in shaping the banking industry and banks need to closely monitor and react to any changes in the political environment.
ECONOMIC FACTORS
Nepal has a very weak economic structure with a low GDP, high inflation rate, trade deficit and low foreign currency reserve. Economic growth drives demand for credit and financial services. Inflation affects the cost of borrow ings and return on investment. High inflation may lead to increased loan defaults and rise in non-performing loans. Interest rates is another critical component of economic factor which impact the demand of loans and deposits in banks. Nepal have a well-diversified economy which is gradually expanding along with the private sector. Banks have been playing a significant role in financing private sector.
SOCIAL FACTORS
The rural areas have been untouched by banking, though government has a policy to open at least one branch in one local level of the country. Small businessman and farmers have to take loans in traditional ways (unsystematic approach). Banks play a crucial role in improving financial literacy and serving those customers who are deprived of banking. Customer expectations are changing rapidly in Nepal and banks need to keep pace with changing customer expectations to remain competitive. Banks also need to understand the cultural context in which they operate to develop and sell products/ services that are acceptable and relevant in such locality.
LEGAL FACTORS
Legal factors play a crucial role in Nepalese banking as banks are highly regulated and must comply with various laws and regulations along with protection of custom ers rights and data privacy. Likewise, the Bank also must comply with taxation laws of the country as well as labor laws.
ENVIRONMENTAL FACTORS
Environmental factors affect the banking in Nepal. Climate change can impact the banking industry in several ways including increased risk of natural disasters. Banks need to manage these risk by assessing vulnerabilities and developing contingency plans even at the time of pandemic. Sustainable development is becoming important for Nepalese banks and must take into account while making investment. The Bank can promote sustainability by investing in environmental friendly projects, energy e ciency products and waste management projects.
TECHNOLOGICAL FACTORS
The banking sector has been immensely changed with the help of technology. With the rise in technolog ical advancements, many people are adapting to new technologies and banks need to provide such services like mobile banking, internet banking and digital payments. Banking now focuses on customer centric approach, Internet banking, ATMs, universal banking, core banking, system automation, etc. This has increased e ciency and productivity. Banks need to invest more in infrastructure to ensure seamless operations of digital banking services. Today the virtual banking concept has reduced costs and provides better customer service. With the increased use of technology, cyber security has been a big concern for banks.
Siddhartha Bank’s position among 20 Commercial Banks (FY 2022-23)
1.2. GOVERNANCE
Siddhartha Bank is strongly committed to ensuring that its systems, procedures and practices reflect a high standard of Corporate Governance. Siddhartha Bank’s Corporate Governance Framework is based on accountability, effective delegation and adequate oversight to support sound decision making.
Siddhartha Bank believes that good corporate governance is critical to the proper
functioning the Bank and thus, has a strong Board, four Board level committees along with
effective control functions and a robust risk management framework with sound risk culture
in place. The Board members and the senior management team are equally committed to good
corporate governance. The Board level committees in the Bank have been formed in line with
NRB Directive.
Further details about corporate governance has been presented in Corporate Governance Section.
Board of Directors
The Bank’s Board of Directors constitutes of six members, with three directors from promoter shareholders, two from public shareholders and one independent director. The members of the Board of Directors are well versed with banking and business in Nepal.The detail about the Board and Board level committees have been presented in Board of Directors and Board level Committees Section.
Code of Conduct of Directors
With a view to lead by example in terms of sound corporate governance and ethical practices, the Board of Directors adhere to the code of conducts regarding the following:
- Honesty and Integrity
- Conflicts of interest and disclosure
- Confidentiality and Inside Information
- Use of Bank property
- Relations with Bank staff and members of the Bank’s governing bodies
- Compliance with Laws, Rules and Regulation
- Disclosure of Information/Regulatory details
- Professional Behavior
Board’s Oversight & Review
on Internal Control System of the Bank
The Board of Directors (BOD) of the Bank appoints the Chief Executive Officer (CEO) and may also appoint other key personnel, including members of the senior management. The BOD provides oversight of senior management, provides them with autonomy and holds them accountable for their actions. The Board expects adherence to the following at all times.
- Bank’s values
- Risk appetite
- Risk culture
The responsibility to review internal control system of the Bank and its effectiveness lies with the Board of Directors. For this purpose, various committees have been formed under the Board of Directors and its authority has been delegated by forming necessary committees for completion of operation in special areas and formation of smooth and effective strategy and its implementation.
The audit committee reviews audit reports of internal auditor, external auditor and supervisory inspection and provides its independent suggestion to the Board of Directors about the effectiveness of the internal control system of the Bank.
The activities done by the Board in the process of oversight have been presented in Committees Section.
Further detail about CEO level committees and Management level committees have been presented in Committees section of Corporate Governance.
RISK MANAGEMENT FRAMEWORK
The Bank has a robust risk management framework so as to identify, eliminate and control the risks inherent in its business operations. The Board Level Committees viz. Risk Management Committee, Audit Committee, Employees Services Facility Committee and AML/ CFT Committee comprising of directors and management are focused to identify, evaluate, analyze, monitor and manage the risks.
The Bank established an independent Integrated Risk Management Department for the mitigation and management of several risks such as credit risk, operations risk, liquidity risk, market risk, interest rate risk, foreign exchange risk and any other risks identified. Further, the Bank has established separate units under Integrated Risk Management Department for internal control and risk management of several risks. The Bank has developed various risk identification and control systems to identify risks inherent to its operations and their control. The Internal Audit Department, which reports to the Audit Committee is an independent unit and plays a crucial role in the ongoing maintenance and assessment of the Bank’s internal control, risk management and governance systems and processes.
The Internal Audit department forms an independent and informed bank records and data, their enquiries, and their professional competence. The findings are discussed with the Audit Committee and ensure effective oversight.
The Bank’s Assets Liabilities Management Committee (ALCO) is a Senior Management Committee which continuously oversees the overall Asset Liability Management and Risk Management of the Bank. The ALCO defines the risks the Bank intends to take in relation to the overall balance sheet management and its business operations.
Besides these, the Bank has also formed Executive Committee, Management Credit Committee and Operations Risk Management Committee. These committees oversight effectiveness of risk management and ensure that the Bank is well positioned to manage risks and achieve its strategic objectives. With strengthening of these committees, the Bank’s management team have enhanced focus on oversight of operational control, risk management, policies formulation and strategy rather than only on business and day to day operational activities. Likewise, the Bank has focused on participative approach by encouraging employees to provide valuable inputs as this helps in increased employee engagement, improved decision making and enhanced problem solving.
Further detail of risk management activities performed by the Bank during the year including disclosure of risk reporting have been Risk Management section. Similarly, the risk governance structure of the Bank have been presented in the chapter Bank’s Risk Governance Structure.
1.3. BUSINESS MODEL
The Bank’s business model is its system of creating values over the short, medium and long term for its various forms of capitals such as financial capital, human capital, social & relationship capital and others by transforming inputs through its business activities. The Bank’s value creation model is depicted below:
- Financial Capital
- Equity
- Reserves
- Deposits & borrowings
- Capital adequac
- Human Capital
- Experienced and competent human resources
- Technical and managerial skills
- Diversity and equality
- Learning and Development
- Manufactured Capital
- Branches
- Branchless Banking
- Remittance Agents
- ATMs
- Digital Payment solutions
- Intellectual Capital
- Technological capabilities
- Integrated risk management
- Management and control system
- Culture and Process
- Knowledge base
- Sales force digitization (CRM)
- Social and Relationship Capital
- Relationship with stakeholders
- CSR activities
- Quality service to customers
- Partnership with government
- Trade partners and merchants
- Provide savings products
- Provide credit to support consumption and economic activities
- Strategic investments to enhance business capabilities for long term value creation
- Facilitate payments and transactions
- Human resource and training
- Marketing Research and Development
- Risk management and Internal audit
- Administration and engineering
- IT system development
- Finance, legal and recoveries
- Financial Capital
- Return on equity of 13.50%
- Operating profit of NPR 4.65 billion
- Net profit of NPR 3.17 billion
- Capital Adequacy ratio of 12.47%
- Human Capital
- No. of employees: 1,970
- 63% of male employees and 37% of female employees
- 246 trainings during the year benefitting 3,786 participants
- Amount of employee related expenditure : NPR 2.85 billion
- Manufactured Capital
- 191 branches and 5 extension counters
- 1,732 PoS machines
- 685,560 debit cards and 38,848 credit cards
- Better service delivery
- 832,222 mobile banking users
- improvement and expansion of digital banking
- Social and Relationship Capital
- 4.21% dividend
- Rs 21.20 million spent on CSR activities
- NPR 2.99 billion contributed to Government through taxes
Further information about Bank’s various business segments along with different conventional as well as Alternate Delivery Channel (ADC) products & services have been presented in Products & Services/Key Business Areas.
1.4. RISKS AND OPPORTUNITIES
The SWOT analysis of the Bank based on the prevailing market scenarios and achievements of the Bank with respect to the strategies and policies is highlighted as under:
Strengths
- Digital Readiness
- Infrastructure
- Mindset
- Competent Human Resources
- Brand Value
- Efficient Utilization of Capital
- Good Governance
Weakness
- Timeline Driven Work Culture
- Assets Liabilities Mismatch
- Risk Based Pricing
- Focused Recovery Measures
- Low Foreign Currency Deposits
Threats
- Implementation of Counter Cyclical Buffer
- Frequent Changes of Regulatory Guidelines
- Volatile & Unpredictable Market Conditions Cyber Security & Increasing Trend of Operational Risk And Fraud
- Digital Disruption From Fintech & Telcos
- Unhealthy Competition
Opportunities
- Increasing Tech-Savy Population
- Untapped Digital Economy & Ecosystem in the National Stage
- National Focus on the Infrastructure Development
- Leveraging of External Published Data
- Increased Migrant Workers
- Facilitation for Foreign Currency Borrowings/FDI
- Integration of Market Place
1.5. STRATEGIC FOCUS AND RESOURCE ALLOCATION
a. Strategic focus
Strategic focus are the priorities of the SBL for this plan period. This plan contains a set of five strategic directions which will guide the bank’s overall efforts and endeavors. This plan aims to drive the bank towards following strategic directions.
b. Strategies
1. Credit Portfolio:
- Focus on MSMEs.
- Focus on low capital charged credit portfolio (high risk assets to be reduced).
- Priority for agricultural and hydro sector to meet the NRB requirements regarding minimum lending in such sectors.
- NPA management shall be focused.
- Pricing for yield enhancement shall be revised.
- New Product and Services Launching to BLB Agent/ Customer
2. Deposits Portfolio
- Current Deposit
- Widen the existing clientele base
- Merchants Accounts: In order to increase the current deposit base of the Bank, the focus shall be to bundle up QR codes with our existing current and prospective current account customers and they shall be extensively marketed.
- Saving Deposit
- Payroll Management: The Bank shall continue to focus on soliciting salary accounts.
- Targeting Non-profit organizations for Savings Deposit
- Targeting Youth for Savings Accounts
- Staff scheme for soliciting saving deposit: Various Employee Incentive Programs with attractive rewards shall be launched to motivate staff members towards mobilization of CASA and individual deposits.
- Follow up on inactive accounts
- Fixed Deposit
- Targeting high net worth individuals:
- Increase the FCY deposit portfolio
- Introduction of New Product and revamping of existing deposit products
- Staff deployment for coordination at Province/Sub province office
3. Treasury Business
- Generate profit from proprietary trading in G7/G10 currencies along with USD/INR solely.
- Exploring the possibilities of option and other derivative products.
- Strengthen its role as ‘Sales Agent’ and ‘Market Maker’ in order to further boost the income from the respective roles.
4. Remittance Business
- Existing resource utilization to improve business: resume existing resources with topmost priority.
- Increase Overseas Presence: Tie up with new business partners in UAE, Canada, etc
1.6. PERFORMANCE
The Bank has effectively controlled and managed credit risk, operational risk, liquidity risk, market risk, interest rate risk, foreign exchange risk and other risks that may occur in the course of business and has adopted the concept of balanced, continuous and sustainable growth in the expansion of the Bank’s business in FY 2022-23.
Key metrics of the Bank’s operation in FY 2022-23 in comparison with previous year has been presented below
Further details about financial performance of the Bank have been presented in Review of Bank’s Performance with Management’s Objectives and Strategies.
Non-financial highlights
Details about non-financial highlights of the Bank have been presented in Non Financial Performance of the Bank.
1.7. OUTLOOK
An outlook discussion addresses the potential challenges, uncertainties and opportunities and the Bank’s strategy in facing the risks and capitalizing on the opportunities.
Outlook have been presented in Economic Outlook. This covers future business as well as economic outlook
1.8. BASIS OF PREPARATION AND PRESENTATION
The Integrated Report has been prepared in accordance with the International Framework issued by The International Integrated Reporting Council (IIRC).
a. SBL’s materiality determination process
The report discloses matters that substantially affects the Bank’s ability to create value and could influence decisions of providers of financial capital. The Bank has disclosed both positive and negative matters, including risks and opportunities and favorable and unfavorable performance or prospects based on their materiality.
Role of those charged with governance and key personnel in the identification and prioritization of material matters
The Board and senior management team are the key personnel in the identification and prioritization of material matters of the Bank. The major decisions taken by the Board, Board level committees, CEO level committees and Management level committees have been presented in Committees section.
- BOARD LEVEL COMMITTEES
- Audit Committee
- Risk Management Committee
- Employees Facilities related Committee
- AML/CFT Committee
- CEO LEVEL COMMITTEES
- Executive Committee
- Management Credit Committee
- Asset Liabilities Management Committee
- Loan Recovery Committee
- Loan Write-off Sub Committee
- Financial Direction Committee
- Operation Risk Management Committee
-
MANAGEMENT LEVEL COMMITTEES
- Procurement Committee
- Assets Disposal Committee
- Record Disposal Committee
b. Reporting Boundary
This report for the FY 2022-23 covers only the Bank’s operations run by corporate office, its branches, Branchless Banking agents and other direct networks in Nepal. Impacts of the activities of our suppliers in other countries are not within the scope 90 of this report. Siddhartha Bank has one subsidiary company viz. Siddhartha Capital Limited (SCL) which is incorporated in Nepal with 51% shareholding. The financial statements of the SCL are prepared on a going concern basis under historical cost convention in accordance with Nepal Financial Reporting Standards (NFRS).
c. Summary of the significant frameworks, standards and principles used to evaluate Bank’s material matters
Integrated Reporting
- International Framework of the International Integrated Reporting Council (IIRC)
Governance, risk management and operations
- Companies Act, 2063
- Nepal Rastra Bank Act, 2058
- Banking and Financial Institutions Act, 2073
- NRB directives, circulars, notices and guidelines
Financial Reporting
- International Financial Reporting Standards
- Nepal Financial Reporting Standards
- Generally Accepted Accounting Principles
Additional Reporting
- International Standards on Auditing
- Nepal Standards on Auditing
- Income Tax Act, 2058
- Value Added Tax Act, 2052
- Securities Registration and Issue Regulation
- Other applicable rules and regulations of Nepal
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