A blacklist of people who have defaulted on loan payments was made public through the media recently. The newspapers took a keen interest, although some quarters turned a blind eye. Rastriya Banijya Bank has listed several businesses owned by prominent Nepali business people for what they term 'punitive action in future'. The Beed feels this smacks of half-baked work that not only fails to understand business issues, but also leave many questions unanswered.

Businesses formed as joint stock companies under the Companies Act worldwide have the fundamental principle of limited liability, so if the business goes bust, the liability of the shareholders are limited to the stock they bought into. You cannot drag the shareholder, his past and the future into the deal. To pull a veil over the inefficient review processes, banks are attempting sweeping measures to clean up business activities. Remember when the stock exchange in Nepal was picking up in the mid-90s and the government could not deal efficiently with insider trading? It slapped up an investor-unfriendly Company Act that practically killed the national stock market.

Now this new list could be an unfortunate repetition of the past. Like the poplars on the Arniko highway, we uproot the whole tree when pruning a few branches will do. Banks must be able to make a distinction between businesses that failed despite genuine efforts and those that were made to fail by promoters, who in turn cash in through the banks. It is a global banking principle that the former merits consideration and the latter, punitive legal action. Banks also must understand that they are partners in the ventures and are responsible for its failure. If the promoters request foreclosure, the banks cannot consider them defaulters.

It isn't the Beed's intention to target banks. In Nepal, good policy intentions of punishing intentional defaulters end up in action that often puts the brakes on economic activities. It is also important to note, as some business people pointed out, that bigger defaulters manage to square up their cases and escape getting outed. The other question is, what effect, if any, does a defaulter's name made public have? It happens far too many times, and frankly, no one really cares. There are lists of corrupt politicians, businesses that squeeze money out of capital markets and promoters of banks that milk their own institutions. It's enough to make most Nepalis throw their hands up and ask, "Why bother?"

This time the Central Bank faces the challenge of proving it will take action on real defaulters. It will also be interesting to see what the other banks will do, as they have defaults on the same account or the same promoter group(s). Needless to say, proper policing of banks and their portfolios by the Central Bank as well as other regulatory authorities are indispensable, but their processes must be acceptable, have public support and result in action. Otherwise it just becomes fodder for the cocktail circuit.

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