Last week, the Nepal Rastra Bank pulled the plug on Nepal Bank Limited (NBL) by dissolving the board of directors and replacing it with a three-man management team. Now comes phase two of the plan: bring in a management contract to turn the ailing bank around.

But, even if everything goes according to plan, it may be early June before the Irish ICC Bank may actually land here to take over the NBL's restructuring. A 21 February Rastra Bank letter blamed NBL directors of failing to run the bank, and challenged it to prove otherwise.

The NBL's proposed reforms may have begun, but the entire exercise is fraught with accusations of insider lending and counter-allegations of political interference by the outgoing directors. There are threats of litigation, and if that happens the reforms may not be as clear-cut as many had hoped.

Rajendra Khetan, who controls about nine percent of NBL's stock, wants a thorough judicial probe on the bank's failure and has also been knocking on the doors of the parliament's Public Accounts Committee. He asks, "Does dissolving the board mean those that who wrecked the bank before we came on board are absolved?" He squarely blames decisions taken when government still controlled majority stock as responsible for the mess the bank is in today.

Another former director, Lok Bhakta Rana had sent a 6-page clarification to the central bank before the board was dissolved, which not only names names of top government and NRB officials, but also hints
at a lawsuit.

"The litigation is ready," Rana told us. "I am weighing the options before going to court, I will sue if I see developments that take place from now are against the interests of the bank."

Former shareholders told us the bank's downward slide began in 1996/97 when politically-tinged loans were approved at a phenomenal rate. The record was the approval of 205 loans on a single day when Sher Bahadur Thapa (now being probed by the anti-corruption body) headed its main Kathmandu office and the directors were Biswonath Sapkota, Bishwamber Pyakurel, Mukunda Aryal, Prafulla Kafle and Jharendra S Rana.

Few disagree with the Rastra Bank decision on NBL, some former directors even say it should have been taken last year after KPMG auditors found a Rs 5-6 billion hole in the NBL's net worth. Since things have not improved since then, it is a good guess that the bank is still deeply in the red.

Despite this, some former directors think the bank is still viable, especially if the government were to help crack the whip on defaulters. Says Khetan: "I am certain that the parties can pay but the government would have to make them." An earlier central bank report had charged Khetan with attempted loan swapping, he denies borrowing from the NBL.

The NBL's board was an interesting mix: two businessmen, two lawyers, two professionals and two government officials. However, in practice the team was divided on almost every decision largely because of conflicting interests of the powerful business lobbies they stood for. The Golchas and Khetans had two directors each.

A list of Top Ten NBL borrowers which was published by Deshantar last week, and confirmed by our banking sources, reads like a Who's Who of Nepali Big Business: the Amatya Group and the Golcha Organisation lead the lot in terms of loan size and unpaid interest. Others include Arun Chand (Basulinga Sugar Mills), B.K. Man and Jit B Shrestha (Radisson Hotel), the Hyatt Hotel, the Chaudhary Group (Mahalaxmi Sugar Mills), Sashikanta Agarwal and the Golyan Group (Reliance Spinning), Sashikanta Agarwal and Saraf Group (Everest Sugar Mills), Gorakhkali Rubber Industries and the Jyoti Group. Their dues add up to over Rs 3.3 billion.

Over at the Rastriya Banijya Bank, Deloite Touche Tohmahatsu (DTT) has put its taking over the management on hold pending a security assessment. Nepal's financial sector reform is funded with a $25 million World Bank loan, and another $10 million grant will come from Britain's DfID.