Nepali Times: What have your main objectives been? J Craig McAllister: This is a bank that has extreme difficulties in virtually all areas. Standards were low, it wasn't computerised, the morale of the employees was low and systems and approaches to credit were not modern. We came in to completely renovate the entire bank.
When loans were made from Nepal Bank previously, collateral was the most important area. We prefer to use collateral as a secondary repayment source. The best collateral is the one that is not directly related to the project. We are also building a new service culture. Our objective is to trim expenses, to rationalise all facets of the operation and then present a plan to the government that allows it to recapitalise the institution adequately.
So, how successful do you think you have been?
We are ahead in some, right on target with others and behind in a few areas. In terms of things that have gone better than we had expected, we were able to cut our losses: it was Rs 3.1 billion the year before we came. Now it's down to Rs 282 million-that's about a 92 percent reduction.
What kind of losses were they?
We do not have sufficient revenue being generated to cover the expenses that arise when you roll in the expense for bad debts. Besides that, our trade finance income had fallen off, our employees' expenses and other normal operating expenses are higher than we wanted. We were able to cut around 15 percent from employee and other expenses.
Did the Maoist robberies affect Nepal Bank at all?
Those are extraordinary losses but we do carry insurance. Only once when one of our branches had a cash deposit more than its ceiling, and the Maoists robbed the bank, we weren't covered fully.
Your bank has a reputation for bad debts.
We were looking somewhere in the order of 38-39 percent of our lending portfolio as bad borrowers but later found out that it was actually a 60-62 percent non-performing portfolio of bad loans. Roughly 80 percent of our bad debts are held by 20 percent of borrowers. Our major debts are held by less than 40 groups or individual borrowers. Those who are adamant not to repay anything, I refer to not as wilful defaulters but economic renegades. Our recoveries in the first year were better, both on the gross and cash basis than we had budgeted for. This year, things are not going quite as well.
Why did you get the Commission for the Investigation of Abuse of Authority (CIAA) to haul in defaulters?
In July 2002, we found pending a letter sent by the CIAA around April. In the course of finding out what was going on in the bank during our own validation, it was also appropriate to involve our internal auditors to research the names that were enquired about by the CIAA. Our conclusion was that the terms and the conditions of the contract in which we put the loans out had been repeatedly violated. We gave them a full report on 24 January 2003 but that was not the banks' effort to make debtors throw up their hands and say, "Enough, we will pay".
What happened?
We don't know. Our actions were misunderstood by a few bad borrowers and others within the community who should have known better. Our response to the CIAA inquiries seemed to have united some people who, in my opinion, are wilful defaulters in various groups. Some pretty important and surprising people joined the protest outside the CIAA, because it seemed like the bank was using police power to recover debts. Those people said we tried to use the CIAA as a debt collecting mechanism. I wouldn't do that for several reasons: first of all, I can collect my own debts because I am a banker and the CIAA is not. Secondly, if they collect the debt, I might not get it back. Banks function best when they do their own work.
So, what percent have you recovered?
Zero.
What next?
We are resorting to legal measures because our efforts in terms of negotiations have not been successful.
How much do the bad loans amount to?
It is Rs 2.5 billion. The borrowers have resorted to their legal rights. We have defended our position and on each level we have been successful.
Have you punished insiders hand in glove with defaulters?
Yes. We did a thorough investigation on loans that were made without central authorisations or board approval. We ended up terminating three employees. A couple of employees were demoted because they made technical mistakes but they were not dishonest. We identified eight bank employees who were implicated in circumstances that involved Rs 52 million. The bank will recover no more than Rs 2 million for that loan.
Have you punished any of the directors involved?
The minutes show that. We are trying to sort out some of those cases. As we did in the case of Fulbari Resort, we will report them to the appropriate authorities.
