Giving credit where it’s due

For months now, Nepal’s media has been reporting on depositors defrauded of their savings by crooked cooperatives. The spotlight got brighter after Home Minister Rabi Lamichhane was accused of siphoning off savings from two cooperatives and investing it in his television company.

Given a chance to defend his case in Parliament, he resorted to whataboutery and accused the opposition Nepali Congress (NC) of even greater plunder. After the row brought the House to a standstill for over a month, a cross-party probe committee has finally been formed, but without naming Lamichhane personally.

Nearly 30 crisis-ridden cooperatives across the country which have more than Rs60 billion in depositors’ savings at risk will be probed by the committee. Another 500 cooperatives are said to be dodgy, and the government says it will be compensating depositors who had up to Rs500,000 in savings in cooperatives that have gone belly-up.

Economist Pushkar Bajracharya says that Nepal’s cooperatives have had problems from their earliest years because of lack of regulation and monitoring which allowed unscrupulous shareholders to invest the savings in questionable real estate deals (best case scenario) or fraudsters to decamp with depositors' savings (worst case). 

“The lawlessness in the cooperatives sector meant that the hard-earned savings of depositors were misused or stolen,” Bajracharya says.

At the root of this pandemic of plunder in cooperatives is the culture of impunity where trusting Nepalis are cheated out of hard-earned savings with the promise of high interest rates. Like pyramid schemes, these are ways for deceitful individuals to cheat gullible depositors because they know they can get away with it.

This is similar to the rampant corruption at all layers of government and across the country where the might of those who hold power seem to have the right to extort and defraud the powerless. In many cases shareholders in local cooperatives are even elected local officials. 

There is even a sitting MP, Gita Basnet, who is accused of pocketing Rs165.8 million from her cooperative depositors, and she has been on the run. A mayor and his wife in Baglung siphoned off Rs3 billion from 1,500 depositors. Criminal cases have been filed against all of them in the courts.

Ironically, the crisis in Nepal’s banks and financial institutions has turned out to be a bonanza for financially fragile daily newspapers which these days are filled with pages and pages of paid property auction notices by banks. These advertisements are from Class A, B, C or D financial institutions and point to an upsurge in loan defaults. 

The Credit Information Bureau (CIB) Nepal monitors 129 financial institutions, and says the number of blacklisted borrowers has grown from 3,609 to 96,331 in the past ten years — nearly half of them made it to the list just this year. Bijay Kunwar of the CIB says the numbers shot up after despositers failed to pay back loans from microfinance institutions. 

The real estate slump is at the bottom of this crisis. Those who had borrowed from cooperatives or banks to invest in property speculating, hoping for fast returns, were trapped with huge loans they could not pay back. The crisis began during the Covid crisis and continued with the economic slump in Nepal caused by the Russia-Ukraine war.

Many defaulters have rallied around businessman Durga Prasai, himself a wilful defaulter who failed to pay back bank loans for a hospital in Jhapa, and held nationwide demonstrations earlier this year. Prasai urged his supporters to stop servicing their loans and to force banks to cancel their debt.

“Prasai’s debt cancellation campaign sowed confusion,” senior economist Keshav Acharya explains. “Some borrowers of cooperatives who wanted to pay back loans were stopped from doing so by activists. And bank borrowers covertly hoped for their loans to be waived.”

Nine months of data from Nepal Rastra Bank (NRB) for the past year shows that the wholesale and retail sectors had the highest proportion of credit (19.9%) and loans to real estate developers made up just 4.92%.

“Many borrowers took loans for business purposes but used a portion to buy property, but since there is a real estate slump it has led to banking defaults,” says Bhuvan Dahal, former president of Nepal Bankers’ Association. 

The default crisis in turn has been a factor in record outmigration in the past year as Nepalis leave to earn money overseas to pay loans back home. If there is a way out of this crisis, it will be to henceforth provide loans for projects that create jobs and not in unproductive sectors.

Pinki Sris Rana