Nepal Bank Limited has tried just about everything to recover bad loans: it took the defaulters to court and even tried naming and shaming them.

That didn't work, and now its aggressive expat manager has written to foreign embassies in Kathmandu not to grant visas to defaulters and is asking the government to impound their passports.

The bank even wants Nepal Rastra Bank and the Ministry of Finance to request the royal palace not to invite the defaulters to official functions. Already, there has been an agreement among Nepal's donors to avoid social contacts with willful defaulters.

Nepal Bank's high-profile defaulters are crying foul, calling the moves unconstitutional and are preparing to fight back. The row has split the business community and put the embassies in a fix.

At the heart of the storm is Nepal Bank's CEO, J Craig McAllister, whose letter to the ministry reads: "There is no single action that would be more effective in demonstrating support to the banking system and the efforts to chronically overdue loans from willful defaulters than action by the palace."

The fight has gotten personal and degenerated into name-calling between McAllister and Nepal's Bank's biggest defaulter, Piyush Bahadur Amatya of Pokhara's Fulbari Resort, who owes the bank Rs 2.18 billion. The other 36 defaulters in Nepal Bank's list owe the bank Rs10 million or more.

An irate Amatya told us in an interview: "The foreigners are trampling on the law of the land." (see Interview) Defaulters say their businesses have suffered because of the country's conflict and argue that there are legal ways to address the problem. "Nepal Bank should have adopted procedural methods instead of blacklisting businessmen and recommending such harsh measures," says Chandi Raj Dhakal of FNCCI.

Other defaulters who declined to be named had a procedural problem with the request to embassies to stop visas. "The bank should have asked the Nepal Rastra Bank to request the foreign embassies not to grant us the visa," said one defaulter. Some lawyers also have problems with the visa-ban. "This move has no legal standing," former attorney general, Sushil Pant told us. "Legally, the bank can't sent a letter like this, nor can foreign embassies entertain them."

Nepal Bank officials say they made the request to stop visas only after exhausting all other means. "We sent them request letters, notices and asked them to sit for negotiations repeatedly," says Ajay Nepal, Nepal Bank's public relations officer. "They just ignored it, that is why we have been forced to adopt these tough measures."

Nepal Bank officials believe they are running out of time because they have only seven months before the renewed contracts of the expat management ends. "If we wait for the Rastra Bank and the ministries, nothing is going to happen," said one banker.

Defaulters, like Amatya blame the World Bank for backing Nepal Bank to arm-twist the defaulters. Indeed, the World Bank is behind the financial sector reform program which aims to bolster the banking industry by, among other things, addressing the problem of non-performing assets of public-sector banks like Nepal Bank Limited and Rastriya Banijya Bank. In his interview with us, Amatya didn't hide his contempt for the World Bank, and even accused it of corruption.

World Bank's country director Ken Ohashi expressed surprise over Amatya's comments. "If there is any evidence of corruption, we would be happy if he came forward with it," he told us. Ohashi argued that the financial sector reform was the government's plan and that it was the government's decision to introduce the foreign management.

"There are competent Nepali bankers for such reforms also," he said. "But since they have social and family relations with the business community and political leaders, it would have been difficult for them to deal with the situation."

But even with the foreign management team, Nepal Bank has only recovered Rs 5 billion of its Rs 20.74 billion in bad loans in the past two years. "We could have done much better if only we had support from the judiciary and administration," says a senior bank official. "There has been no hearing on cases we have filed against defaulters."

Indeed, government officials and even businessmen say prominent defaulters are so powerful that they have succeeded in knotting the recovery process in legal tangles. The stay orders that the courts have issued at the petition of the defaulters have prolonged the process.

Bank officials say they have been forced to take strict action because the CIAA was also dragging its feet. "Had the CIAA taken action against one official, who had lent the money violating the banking norms, it would have sent the right message at the right time," said one official.

At the CIAA, commissioner Basu Deb Lamichhane told us his office had interrogated more than a dozen ex-officials and board members of Nepal Bank. "It is true that it took some time, but we were just trying to do a thorough job," Lamichhane told us. The CIAA did find there was hanky panky and collusion between the defaulters and bank officials.

The business community is divided over the pressure being put on defaulters. Most are against Nepal Bank's moves to stop visas, saying it is high-handed. Others support it. "It is the public's money, it is their savings that will go down the drain," says industrialist Rajendra Khetan. He says defaulters include some "big boys" who are leaning on the chambers of commerce to save their skins.

"The business community is 40,000 strong and it is certainly not going to defend the 200 or so defaulters," Khetan told us. Other businessmen say the defaulters' argument that they are hurt by the conflict doesn't hold water because others are exposed to the same conditions and have managed to pay their loans.

The Public Accounts Committee of the dissolved parliament had in 2000 raised the issue of willful defaulters at a time when the blacklist had only 20 names. But since the investigation did not go anywhere, the list has now more than ten times that number.