It's official. The central bank is planning to hire management experts by May next year to try to turn around two of the country's largest banks, which auditors have written off as being on the verge of collapse. Top government and Nepal Rastra Bank (NRB) officials told parliament's Public Accounts Committee (PAC) that injecting fresh management ideas into the banks could help plug the hole in their accounts which are already billions of rupees short.
"They're both ailing and failing," says Bimal Koirala, secretary at the Ministry of Finance. He adds that both the fully government-owned Rastriya Banijya Bank (RBB) and the Nepal Bank Limited (NBL), in which the state has a 41 percent stake, have poor lending practices and over-valued collateral which, even if disposed of, is not enough to get the banks their money back. Koirala pointed out that in other countries large institutional borrowers reflect the strength of banks, but in our case they are the major defaulters.
The central bank has chosen eight proposals out of 41 received from foreign companies showing interest in managing the two banks. The eight have been asked to submit detailed business plans for further evaluation. The eventual management contract would be for a two-year period, with the possibility of extension for another year. Early this year auditors from the London-based auditing firm KPMG Barnet said the banks had negative net worth totalling Rs 20-25 billion. Government officials told the PAC the hole is already Rs 6-10 billion deep, excluding capital adequacy shortfalls that add up to another Rs 1-1.5 billion. "There could be differences in the amount, but the fact is both banks are very weak," says Dipendra Purush Dhakal, Governor of the NRB. "Their capital is almost depleted."
RBB raised the interest on deposits last week, in an attempt to prevent two of its largest institutional customers, the Royal Nepal Army (RNA) and Employees' Provident Fund (EPF), from making withdrawals. There are reports that RNA has begun to withdraw parts of its Rs 2 billion at the bank. The EPF has roughly Rs 6.5 billion with RBB.
The central bank has already ordered NBL and RBB to tighten lending by identifying who can sanction loans and who cannot. Dhakal says he's determined to ensure that both comply with the instructions. The government's financial reform plan includes formulating new legislation and strengthening supervision of the central banks. Dhakal adds that all the central bank has asked for is that borrowers be categorised and that lending to the worst defaulters be stopped. Also, the management team won't comprise only foreigners, but will have three Nepali experts and five from overseas. The independence of the central bank, the main reason for some of today's problems, is only a side issue. The issue of political appointees to bank management boards-especially at the RBB-is something the PAC hasn't asked about and the government isn't mentioning it either.
The main opposition party and employee unions oppose the government's attempt to hand over the two banks under management contracts. They say solutions should be found within-such as looking at the credentials of top officials at the RBB, some of whom have little banking experience, not-so-clean records, or both. Dealing with the NBL is trickier because the government is only a minority shareholder in it.
