Nepali Times Asian Paints
Headline
Something is rotten.


BINOD BHATTARAI


So, Nepali taxpayers will be paying $10 million to get Rastriya Banijya Bank and Nepal Bank Limited rescued by international consultants. But wait: if you thought these parastatals were rotten you should take a sniff at Nepal's commercial banking sector.

Non-performing assets, conflict of interest, murky offshore ownership, well-connected defaulters, loan swapping, political obstruction. You name it, Nepal's private banking has it. Even the governor of the Nepal Rastra Bank, Tilak Rawal, admitted recently that the state of our banking sector was "terrible". A donor representative involved in financial reform told us: "Nepal has the weakest central bank in the developing world."

The reason is not difficult to see: political interference. Especially since 1990, bankers with patronage could get away with getting anything they wanted approved by the regulator. Nepal Rastra Bank's first governor, Himalaya Shumsher Rana said in a recent interview: "Only three of 12 governors actually completed their five-year terms in its entire history because they were sacked for undefined exigencies."

All this is now coming back to haunt the Nepal Rastra Bank, the national economy and the Nepali public. Till now, we had all thought it was only the Big Two (Rastriya Banijya Bank and Nepal Bank Limited) that needed rescue. But it is becoming increasingly evident that private banks may not be in much better shape.

Shovan Dev Panta, a 16-year banking veteran, and CEO of Nabil Bank, admitted as much at a recent meeting on financial sector reform. "The financial sector is in an appalling state," he said, disclosing that the non-performing assets of private banks may be even higher than the central bank's estimate of between 1.6 to 9 percent. This could grow if the economic downturn is not reversed. He added: "I am scared of what could be ahead." Nepal's financial sector is made up of 13 commercial banks, 12 development banks, 49 finance companies, 34 financial co-operatives and 16 NGO-run financial co-operatives. Among commercial banks all except one, and three or so not-so-bad ones, are said to be in trouble. All evidence gathered for this article point to the regulatory agency not doing it job properly. None of the bankers, regulators and auditors we interviewed for this investigation wanted to discuss the record of specific banks. But there are some indications of just how deep the malaise is.

For example, several years after the original promoters sold their stock in Nabil Bank, not even its shareholders officially know who actually owns the largest block of the company's shares. The National Bank of Bangladesh purchased the 1.9 million shares, but these were later transferred offshore to an entity called NB International Ltd incorporated in Ireland. If the central bank knows about the ownership of this company it hasn't told anyone as is required for companies listed in the stock exchange.

"There are few secrets in Kathmandu," one senior banker told us. "And everyone pretends not to know what is happening. We have our heads in the sand."

Another example: almost every bank and financial institution here has reported profits from the first year of operation. Even after the economic slowdown that began in early 2001, many showed profits. Asks one perplexed auditor: "How can banks be in profit when the industries they have invested in are all reporting losses?"

The central bank issued its ownership guidelines ("Directive 8") in mid-2001. Till then it was a free-for-all: anyone, even those with interests in the industrial sector are allowed to own banks. Many promoters have borrowed from their own banks and not paid back. "Here's how the scam worked," a Nepal Rastra bank official explained to us. "You put in Rs50 million to promote a bank and then borrow Rs500 million from it. They are not opening banks to do banking, but to siphon loans for themselves." In most cases the central bank is unable to nab promoters because they tend to be well-known "captains of industry" with connections that span the political specturm. In mid-January 2002, Nepal Rastra Bank in fact ordered one private bank to stop taking deposits precisely for this reason.

In the absence of ownership guidelines and less-than-transparent disclosures, some business families now have controlling interests in not one or two, but up to five banks and financial institutions. Owners can therefore use one bank to guarantee a loan from another, and both end up losing because the loans are mostly overvalued and seldom paid back. Cross-ownership also makes it easy to swap bad loans. The losers in the end are trusting Nepali depositers, the economy and investor confidence.


LATEST ISSUE
638
(11 JAN 2013 - 17 JAN 2013)


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