Nepal\'s largest banks, Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB), are up to their necks in bad loans. Bur more worrisome is the failure of both the government and the central bank to show that they have the political will to address this crisis.

Directions from the Nepal Rastra Bank to NBL and the RBB in April say it all: when you have the time, let us know what\'s going on. Or, words to that effect. Besides the shockingly banal tone, as if it were dealing with the most ordinary thing in world, the letter was couched in officialese, asking the banks to burnish "comments and suggestions...within seven days". That, on a serious and damaging auditor\'s report.

This was the Draft Final Report of a study done by KPMG Barents as part of the World Bank-supported Nepal Banking Reform Project. The Rastra Bank letter, however, warned that as some points in. the report were \'\'very sensitive" the banks are 10 restrict its circulation.

But that did not prevent leaks to the press. And what a story the leaks told: both NBL and RBB have negative net worth, totaling a staggering Rs 25 billion, plus another Rs 5 billion to meet capital adequacy. Said one international finance expert: "No bank in the world would be allowed to lend with such a large negative worth." The essence of KPMG\'s findings was that bad politics, bad management, bad governance, bad accounting and bad business practices all had a role in ruining the two banks. Said a senior banking source: "The KPMG report told us what we had suspected all along. The situation is critical and if you leave them as they are the banks will collapse."

The government now has to seriously weigh the cost of not dome anything. The two banks together hold up to Rs 7 billion worth of government provident fund deposits, and another Rs 6 billion of the Army. And then there are the millions of Nepalis whose deposits are not insured. What is worse is the lack of tangible counter-measures to arrest the downslide. Official recognition about the seriousness of the problem would at least give some hope. The Finance Ministry says it is up to the Nepal Rastra Bank (NRB) to act, but [he central bank is not totally independent and rarely functions without a nod from the Ministry.

Bank	Total Assets	Loans	Deposits
Rastriya Banijya Bank	44.0	20.8	27.0
Nepal Bank Ltd.	34.2	18.1	28.1
Nepal Grindlays Bank Ltd.	10.3	4.0	8.5
Nepal Arab Bank	11.0	4.9	8.7
Nepal Indoduez Bank Ltd.	3.3	1.6	2.6
Himalaya Bank Ltd.	8.7	4.0	7.7

The reason for the buck-passing is clear. Finance Minister Mahesh Acharya had resigned from the Bhartarai cabinet earlier this year, following differences over the appointment or Tilak Rawal as Rastra Bank governor. (Incidentally, Rawal is a former head of RBB.) Now, Bhattarai is out, Acharya is back as finance minister, and Rawal is still the governor. What this means is that the two men who should be working together to tackle what is perhaps Nepal\'s worst banking crisis are said to barely stand each other.

Ask the Ministry what is happening with the reforms and the answer you get is that the Rastra Bank is working on it. At the Bank, they say a "matrix of reforms" has been sent to the ministry and the World Bank.

Sources say the matrix includes a proposal appointing new management teams to run the banks. Section 29A of the Commercial Banks Act allows NRB to take up the management of sick banks. The question is, will the Rastra Bank act, and, if so, when?

The government owns Rastriya Banijya Bank wholly, and holds 41 percent of Nepal Bank shares. But even if the law allowed the NRB to act, there are still the unions to deal with. It would require declaring banks as essential services, and that can only be done by the government, which basically means the Finance Ministry.

KPMG auditors mention instances when top management decisions at NBL have been changed under union pressure. De-fanging or banning unions will nor be easy because they are \'fraternal" extensions of various political parties. Bank unions are so powerful that office bearers don\'t have to work during office hours, even though they receive the same salaries and benefits as other employees.

Says a banking source. "Since those in the unions have already proved they are not actually needed for regular banking functions that is where downsizing should begin." Both banks are terribly overstaffed. Of the 6,341 NBL employees, around 1,100 active union members at NBL alone, nearly half of whom are engaged full time in union activities.

The government can intervene easily in the name of public interest, but that is going to be tough. Politicians of every shade have fiddled with the operations of the two banks at one time or another. They\'ve not only used them to provide employment to friends and relatives, but have also influenced lending decisions to favour cronies and campaign contributors.

Members of parliament still accompany constituents to help them get loans, said another source from banking circles. Larger loans are sanctioned on the telephone by people in "high places", or expedited through management cronies.

In all their years of operation, NBL and RBB have yet to take action against any fraudulent use of loans mainly because of lack of adequate laws.

It is not just the government that is to blame. The country\'s biggest business houses are the biggest defaulters. Insider dealings are rife. At NBL, some borrowers have adequate shares to nominate directors, who are then used to procure loans.

Inflated financing for projects arranged through a consortium of banks are lubricated by political connections, allowing them to override standard evaluation and monitoring processes. This explains the concentration of loans in a few sectors (sugar, steel, textiles), and the huge exposure of some individual businesses.

What keeps the two troubled banks still afloat is their access to large deposits of government and semi-government agencies. and their nationwide networks which help them to mop up the savings from a vast population of small, unsuspecting individual depositors.

While examining the banks, KMPG applied Bank for International Settlements (BIS) standards which provide guidelines on capital adequacy, ending guidelines and borowers not providing adequate financial information. In simple terms, these guidelines are about reporting assets only if you are reasonably sure about their collection.

Instead of doing something to avert crisis, critics of the KPMG report, like Punya Prasad Dahal of RBB have alleged that BIS guidelines are "unrealistic\' in Nepal-implying that regulations here should be more elastic. And Governor Rawal told a gathering of bankers last month that NBL and RBB were "too big to fail". Many are not so sure anymore.

The other crisis in the banking sector seems from the collapse of real estate prices by 50 percent since 1996. Most of the collateral for outstanding loans are properties which are now worth much less.

There is evidence that the Rastra Bank\'s banking investigation cell has been warning about the state of the banks long before the auditors came into the picture. Why were the problems not addressed then, is a question that Nepali politicians better have an answer for very soon.