The Nepal Rastra Bank has begun to get tough with the management of Nepal Bank Limited (NBL), the second large bank after the Rastriya Banijya Bank that is to be turned around under the government's financial reform project. On 21 February, the NRB activated a provision in the new Central Bank Act #86 and wrote to the NBL asking why its directors should not be suspended having conducted bad banking. The NBL was asked to respond to the central bank within 15 days, as required by law. Should the Rastra Bank not be satisfied with the response, it can take over the bank. The charges are obvious: a huge pile of bad loans, poor repayment rates and collection efforts, high operating losses and inability to present updated financial statements and hold Annual General Meetings on time.

The government owns roughly 41 percent of the NBL, the remainder is controlled by large private businesses and other shareholders. There were reports the NBL would suspend lending, which needs to be approved by the directors when it involves Rs10 million or more, saying it needs time to take stock of and respond to all the questions raised by the central bank. Analysts see the move as a veiled threat to the central bank in the hope there will be political intervention. Last year, when the Central Bank issued directives governing capital adequacy and other prudential banking measures, the NBL said that as it could not meet the requirements, it would stop deposits and lending. That threat forced the central bank to waive capital adequacy requirements. What will happen now is anyone's guess.

And, even before the new outside management has been authorised to take over the Nepal Bank, it has been changed. The lowest bidder, PriceWaterhouseCooper, was disqualified because of "inconsistencies" in its financial bid, which included conditional clauses for staffing costs. The central bank is now negotiating with the Irish ICC Bank, the next bidder on the shortlist. ICC's bid fee to mange the bank over two years was $4.98 million, only slightly higher than PriceWaterhouseCooper's.

The World Bank is to provide $25 million to finance the management contract, and implement other reforms at the central bank, including enhancing its supervision, research, accounting and management capacities. The British Department for International Development (DfID) will give $10 million in grant assistance that is to be spent in accordance with the larger financial sector reform project.