‘Willful defaulters will no more be able to continue evading their obligations'
- J Craig McAllister
After the government handed over the management of the public sector Nepal Bank Limited (NBL) to the Bank of Scotland and Ireland in July 2002 for a period of three years, J Craig McAllister --as its CEO -- has been trying hard to rescue the loss-making bank. The 65-year-old banker from Maryland, USA spoke to Nepalnews about his stint at the oldest bank in the country. Excerpts:
How would you assess your own performance since you took over at the NBL?
I am proud of our management results over the term of our contract. Prior to our assumption of management control, NBL had posted mounting losses for six consecutive years culminating in a loss of NPR 3.1 Billion in the year before our management team joined the bank. When we assumed control NBL had a sizeable negative equity position with a large non-performing loan portfolio, outdated systems and procedures, a high cost of funds, a staff twice as large as required, no planning or budgeting effort and a shrinking customer base. NBL was a failed financial institution and technically bankrupt.
At the conclusion of our first two years our externally audited results showed an operating profit of NPR 418 million and a net profit of NPR 789 million at fiscal year-end 2003/04. That is a turnaround of 125% and the result speaks for itself. When one considers the fact that NBL expensed the Voluntary Retirement cost in one year rather than over an extended period, that adds another 1 Billion to our turnaround figures and shows a positive swing of NPR 4,865 million in actual results.
In two years, Nepal Bank moved from posting the largest loss in the history of Nepalese financial markets to producing the highest audited profit among banks in the market in 2003/04. The bank has been successfully restructured in all areas and is reducing the negative equity position dramatically. Our staff has been reduced by approximately 49%, new systems and procedures have been successfully implemented, computers are being installed, our cost of funds has been reduced by more than 50%, and we have a strong budgeting process with a rolling strategic plan that presently carries NBL out to fiscal year-end 2007/08. Despite everything said above, there are still many things to do before NBL can completely reclaim the banks traditional leadership role within the financial markets.
Our biggest success has been the ability to forge an effective working relationship with the staff of the bank. None of the results mentioned above would have been possible without the support and hard work of the entire bank. It takes the entire staff, focused on the key issues and working together, to achieve what has been done at NBL.
Other notable successes have been the divestiture of NBL investments in other financial institutions, our facilitating the external auditing in the first eight months of our project of the three financial years that previous management did not audit, a successful Voluntary Retirement program, a dramatic increase in liquidity and a substantial reduction in funding costs. I also consider our NPA recovery results as one of the major successes of the project, although that effort appears to have gone unrecognized and unacknowledged in the market.
Our computerization project has taken substantially longer than anticipated. While some of the causes were beyond NBL control, some things could have been handled better within the bank. We are past the problems in this portion of the project and will complete the full implementation of computers in timely fashion.
The lack of success in overcoming the focused and aggressive opposition of a small group of willful defaulters to the repayment of their non-performing loans has been very disappointing. Approximately 40% of non-performing loans at NBL are held by about 15 groups of influential borrowers. One borrower accounts for 15% of our bad loans. The vast majority of NBL borrowers have been responsive to the plight of the bank and have honored their obligations to the extent they are able, sometimes with great personal difficulty. On the other hand, this small group of willful defaulters has been steadfast in their refusal to negotiate in good faith. Willful defaulters can best be defined as blacklisted borrowers with the capacity to resolve their obligations if they chose, but who are unwilling to do so. They utilize their influence to remain above the law and pose a grave danger to the recovery of Nepal Bank. They also represent a clear and continuing danger to other commercial banks and the Nepalese economy as a whole.
You had courted controversy by writing to the Kathmandu-based diplomatic missions not to issue visas to willful defaulters of the bank? What has been their response?
It was not my intention to cause controversy. My objective was to encourage a change in the permissive atmosphere that allowed willful defaulters to evade their overdue financial obligations with impunity. It has become quite clear, however, that those who screamed the loudest were the ones with the most at risk!
The response has been exactly what it should have been. The diplomatic community, within their respective rules governing the issuance of visas, will cooperate with the guidance provided by the Government of Nepal. The entire issue becomes a moot point, however, if the passports of willful defaulters are confiscated by the Government.
Now that the government has introduced new regulations, how optimistic you are that willful defaulters of the banks could be reined in?
I am very optimistic that willful defaulters will not be able to continue evading their financial obligations. The people of Nepal realize the damage to the economy that has already occurred. The danger to the nation these economic renegades represent, as they seek to prolong their “culture of willful default”, is also quite clear. Public disapproval will make it increasingly difficult for a borrower to willfully evade financial responsibility in the future.
I believe the Government when they say they will act. The new initiatives are encouraging. However, sustained regulatory enforcement is the key and I am sure we will see such enforcement, on a consistent basis, in the coming weeks.
What has been the impact of on-going conflict in your operations outside Kathmandu?
The on-going conflict has seriously affected NBL operations and profitability. Many of our customers, particularly those with operations outside the Kathmandu valley, have been severely affected in their overall profitability and their ability to generate cash for continuing operations. When our customers are affected the bank is affected.
NBL has been directly affected in the control and management of cash in branches. In many areas branch funds are now maintained in military barracks. The placement and retrieval of those funds adds substantially to the workload and stress of staff, delays transaction times and increases cash in transit insurance expenses and funds transfer costs. The security situation has given rise to substantial increases in total insurance expenses. Some of the bank branches have been looted and, consequently, the administrative burden of duplicate record keeping throughout our 117 branch network has placed an additional burden on our staff. The security situation hampers our efforts in customer contact and in loan collection. The concern over customer and staff safety during this insurgency is a constant worry at all levels within NBL.
The NBL is still said to have negative net worth. What needs to be done to turn it around?
New sources of equity must be identified. NBL must reestablish an equity base in compliance with the rules and regulations of the Nepal Rastra Bank capital adequacy requirements as quickly as possible. Profitable operations in the bank must be expanded to support the new equity base and to spur growth in the bank, in our customers and the economy as well.
(Please post your comments to feedback@mos.com.np.)
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