Nepali Times
Strictly Business
Loan blows


Fifty-three Nepali individuals and business houses owe a total of Rs 15.2 billion to Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB). It is far from clear how we should go about recovering this.

One reason is that loans, when used effectively, fuel business. Any owner of a for-profit firm will tell you cash is her firm's lifeblood. Things go well, they collect cash from customers, pay bills, and use the remainder to invest in further growth.

In a competitive marketplace, her firm faces a variety of risks which it can't control. Most firms are unlikely to have paying customers right from the beginning, or even regularly for long. So, to get started, to develop and sell products and services, and keep on growing, they need cash, which they borrow from banks. In due course, earnings show up, and the loans are repaid with interest. If this isn't done, at some point the firm is forced to focus only on paying off the debts, not on going further.

This is where the Nepali case becomes strange. Despite having creditors banging on the door, most bosses of defaulting firms continue to run their companies.

Business magazines put some on the cover, hailing them as heroes, and publish spreads about the most ad-friendly slices of their conglomerates. In Kathmandu's cocktail circuits, ambivalence runs high. Defaulters are seen as likable victims who deserve sympathy, not as scheming crooks who should be thrown in jail.

The government periodically talks about applying social pressure, boycotting defaulters, or taking away their passports. But nobody believes drastic measures will really be taken. And when the money involved belongs to formerly state-managed banks, where political meddling, corruption, and mismanagement always meant 'business unusual', ordinary Nepalis find it hard to get agitated and demand their billions back. These cat and mouse games neither provide a way out nor develop confidence in Nepal's financial sector.

One solution could be to believe individuals who say that what they owe exceeds what they own. The process then is not to write off their IOUs, but to work with them, one by one, and see whether they can be legally declared bankrupt. There is a provision for filing personal bankruptcy in Nepal's Muluki Ain. Lawyer Jogendra Ghimire says it allows creditors to snatch a proportionate share of what's left. No Nepali has taken advantage of the law, but given the billions involved, shouldn't we try to bring the defaulters within the penumbra of an existing law, instead of just shouting at them from the sidelines?

For legislation dealing with failed firms' debts to have teeth, there need to be skilled personnel manning relevant new institutions, such as a Debt Recovery Tribunal, Insolvency Office, Commercial Court and the like. Here, media vigilance can play an effective role too.

Ultimately though, the government and the business community have to come together to portray personal bankruptcies and corporate liquidations as part of healthy processes that clean out the cobwebs of our financial systems. Putting a speedy legal closure on defaulted loans will allow entrepreneurs to settle with what they have, and then pick up the pieces and make a fresh start in business.

(11 JAN 2013 - 17 JAN 2013)