Nepali Times
Little to bank on


It would be ow that the honeymoon period of the new foreign management of Nepal Bank Ltd (NBL) and Rastriya Banijya Bank (RBB) are over, stakeholders have begun to have doubts about reforms. Even though an official report on the reform process over the past year is awaited, it looks like Nepal Rastriya Bank is getting impatient with the results. While making its monetary policy public recently, governor Tilak Rawal expressed dissatisfaction with the slow pace of reform.

Rawal's concern is worth noting, especially because the architects of the reforms are upbeat about it. World Bank country director Ken Ohashi wrote in an op-ed piece in May in Kantipur in which he gave the impression that banking sector reforms were on track, a view that was echoed by Sukhwinder Singh of the IMF in an interview in this paper ('Nepal needs help for self-help', #154).

But the general public, which does not have access to the real behind-the-scenes information, has begun to sense that things are not going as smoothly as the reformers had planned. In fact, there is a feeling that the situation at the ailing banks may be getting worse.

The main task assigned to the new management was debt recovery, and it was committed to bringing down non-performing assets (NPA) to 10 percent and 5 percent of the total outstanding portfolio in the first and second year of its management control, respectively. The performance has fallen short of target. It could perhaps be argued that the target itself was unrealistic, but management control was handed over on a fundamental premise that the new manager would be a financial wizard with experience in turning around sick banks.

The Rastra Bank can't be absolved of its responsibility either, as the contractors were hired without adequate spadework. Bad loans amassed by these banks were not analysed, classified and realistically valued, to be agreed with the new managers. This left room for ambiguity and dispute. The new management made a smart move by making provisions to check non-performing assets in the period prior to their takeover. NBL and RBB managements claim that they have recovered over Rs 1 billion each from delinquent borrowers. The loan administration process has been streamlined, accounts are updated and the latest audited financial statements are available. But since all bad and doubtful debts were provided for, the new management could ride over mounting non-performing assets and highlight its success, however slight that may have been.

The major problem with loan recovery is inadequacy of information available within the banks about borrowers, including cash flows, quality of security, management and financial information, industry environment, marketability of collateral, etc. Very little seems to have been achieved after the new management took control in creating borrowers' profiles that could be relied upon for developing recovery or exit strategies.

In a bid to cover up its lapses the management of NBL has moved to the CIAA for recovery of debt that it alleges was fraudulently lent, a move sharply criticised by the business community. NBL's move could further delay the recovery process as the borrower would become subjudice and other recovery proceedings are stalled till the final court verdict is pronounced.

The second challenge facing the banks was to stabilise their deteriorating operating results. Due to the ever narrowing spread (difference between interest income and the interest expense), the banks faced increasing difficulty in serving the interest on deposits from the interest income, let alone defraying other operating and administrative costs.

The audited result of one full year's operation under the new management will take some time to be made public. The claim from certain quarters that the situation is improving is premature. The reality appears to be that very little success has been achieved in interest recovery, especially from chronic defaulters and the 'Big Fish'.

There has been some recovery from borderline borrowers and others are merely book adjustments by rescheduling overdue principal. Unless a significant portion of overdue principal and the interest are realised in a timely and regular manner, it will be hard to rescue these banks from technical bankruptcy.

The new management has been entrusted with turning the banks around, putting in place internal control systems, automating operations, book keeping, updating accounting, bringing everything upto international standards, and modernising the management and making it capable of managing the banks independently. All this was supposed to be achieved within three years.

Going by the pace of present progress, it doesn't look like the goals will be met. There is mistrust and a crisis of confidence between employees of the banks and the new management team. Their authoritarian style has failed to win the managers goodwill and support. Salaries at these banks are far lower than prevailing rates in Nepal's banking industry and, furthermore, there is a glaring gap in remunerations between employees and the management team.

Very little is achieved by updating accounts since major problem areas like the adjustment of reconciling items in branch, agency, inter-bank accounts, and the reconciliation of government transactions, identification of fixed assets and quantification of retirement payments remain largely unaddressed.

Plans for upgrading qualifications and skills of employees have not yet been implemented. Instead, a voluntary retirement scheme has been introduced that has angered unions about the whole reform process. The most serious constraint is the absence of a management succession plan. What happens when the three years are up?

The highly-motivated and excessively paid management team will run things as long as the World Bank is generous enough to fund them. But after the contract period, the management will again fall upon 'dead wood': under-motivated, under-paid, unskilled and incapable employees. And we will be back to square one.

The Nepali public would be burdened with an additional debt of over Rs 2 billion - the cost of the banking reform - which was financed by a World Bank loan. NBL and RBB are not liable for the repayment of this loan, and it goes unrecognised in their books. This could be a classic example of innovative accounting and might draw the attention of NRB, which is advocating implementation of International Accounting Standards in the banking industry.

Tirth Upadhyay is a practising chartered accountant and a leading banking consultant. He was involved in the diagnostic review of NBL and RBB whose recommendations form the basis for the banking sector reform program.

(11 JAN 2013 - 17 JAN 2013)