AMC formation contravenes NRB Act

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KATHMANDU, Feb 24: A legislative complication has emerged over the proposed establishment of the much touted Asset Management Company (AMC) as the recently enacted Nepal Rastra Bank (NRB) Act prohibits any investment by the central bank in the financial sector.

Clause 7 (1b) of the new NRB Act bars the central bank from purchasing shares of any commercial banks, financial institutions, public enterprises or any other companies. It also disallows the NRB to hold ownership rights in any sort of company including that of financial, trade, agricultural, and industrial.

Nevertheless, Clause 7 (2a) of the Act allows the central to hold ownership rights of upto a maximum of 10 per cent of the total capital of the institutions that helps the NRB in discharging its duties and responsibilities.

The proposed AMC that aims to bring down the swelling size of the bad debts in the financial sector, especially the banking sector, was to be established with a capital fund of Rs 1 billion, out of which the NRB was to invest Rs 490 million. However, with the new NRB Act in place, the central bank can contribute to a maximum of only Rs 100 million on the capital fund of the proposed company.

Experts are now apprehensive if the new company would be formed at all. Their reasoning is based going not just by the provisions of the NRB Act, but also by the usual losses that such asset management companies end up in.

"Since asset management companies around the world has a history of losses, the private sector would not be interested to be a part of it. Here in Nepal, with legislative restrictions, the NRB plans may not materialise soon," says an expert, who is an official at the Ministry of Finance.

He further added, "Since the government itself is presently pressed under resource constraints, it is unlikely that it would be interested to make any huge investment at this point in time."

The central bank had forwarded the basic guidelines for the formation of the AMC to the Ministry of Finance for final approval few weeks back. The proposed AMC would primarily focus on the management of the non-performing assets of four financial institutions that include Nepal Bank Limited (NBL), Rastriya Banijya Bank (RBB), Agricultural Development Bank (ADB) and Nepal Industrial Development Corporation (NIDC).

The AMC would deal with limited number of bad debts as declared by the Credit Information Centre. It would be dissolved after the NPAs are reduced to a minimum acceptable level.

According to guidelines set by the NRB for the proposed company, the AMC would revaluate the collateral and loans of financial institutions at current price. The AMC would take in charge of the bad debts and issue government-backed AMC bonds of equal value to the concerned financial institutions.

The AMC would initially deal with a total of Rs 11 billion NPAs of the two giant commercial banks, namely NBL and RBB. According to the NRB statistics, over 20 per cent of loans of the NBL and the RBB are non-performing assets.

Experts lament over regulatory weaknesses

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KATHMANDU, Feb 24: Speakers at a programme today viewed that laws governing Credit Information Bureau (CIB) should be formulated to ensure its credibility in risk minimisation and portfolio management, especially in the wake of recent changes in the financial sector.

Established in 1989 under Nepal Bankers Association (NBA) and with the support of Nepal Rastra Bank (NRB), the CIB aimed to generate database of the commercial banks’ lending of over Rs 500 thousand. However, it still lacks regulatory mechanism whereby it could acquire such information from the commercial banks, they highlighted.

"In the absence of concrete laws, bankers, the CIB and even the central bank has been losing cases at the court against the borrowers and defaulters even as the bureau has been failing to generate authentic and updated database," they said

They were speaking at an interaction program on ‘Upgrading the CIB’ organised by the NRB with a view to thrash out modalities of bureau’s operation, service flow and measures to enhance its effectiveness and efficiency.

The programme also aimed to obtain feedback and recommendations from players in the financial sector in a bid to restructure the CIB’s organisation, amend the NRB’s directives governing the bureau and to recognise its existence legally, among others.

Inaugurating the programme, Dr Tilak Rawal, Governor, NRB said that the CIB, which plays an important role in financial sector’s performance by flowing the information of the borrowers should be strengthened as an independent and effective body.

He even informed that the NRB is mulling to govern the CIB by a separate act, which will be formulated soon and aims to run it as an autonomous body.

Dr Ram Babu Pant, Deputy Governor, NRB viewed that the total set up of the CIB should be overhauled to address the changes seen in the sector, especially in terms of quantity, scope and volume of activities of the financial institutions.

Prem Shanker Shrestha, Chief of the CIB, meanwhile, said that lack of timely delivery of the information from various financial institutions has affected the database of the bureau.

"In the absence of its own resources the CIB, even after 12 years of its establishment, is still operating under the NRB’s grant," he lamented. This contradicts with the initial agreement of the NRB which states that the central bank would provide it grant for three years only.

Shrestha further said that currently 15 commercial banks and 5 development banks are being facilitated by the service of the bureau even as 7 finance companies are utilising its information.

Presenting paper on the occasion, Ganesh Kumar Shrestha, Executive Director of Non-Banking Regulation Department, NRB, said that the CIB had a list of 16,386 creditors by the last fiscal year-end among which 1389 were "blacklisted" and 898 were enlisted "defaulters".

The CIB blacklists those creditors burrowing over Rs 2 million but failing to repay it even after 6 months from date stipulated and whose securities is undervalued, as per the directives of the NRB.

Similarly, creditors burrowing Rs 500 thousand to Rs 2 million and failing to repay it even after 6 months from the agreed date are enlisted as "defaulters".

Furthermore, the CBI was in process to enlist 371 creditors in the list of "defaulters" or "blacklist" by the last fiscal year-end, while 10,392 were rated as good creditors during the period, Shrestha added.

Highlighting the weakness of the bureau, he said that it has failed to fulfil its responsibility of information intermediation, control the financial irregularities done by creditors and incorporate all the financial institutions. It has also failed to sire operational self-sufficiency.

Similar to a report of a "Committee for Upgrading Credit Information Bureau" formed by the Bureau’s management in November 2001, he recommended the bureau to slash credit limits for gathering information to expand its coverage and to develop it as ‘one-window system’ for gathering and using credit information.

The report of the committee had even viewed that it should be operated as a public limited company and should involve all the financial institutions including development banks, finance companies and co-operatives.

Economy, Finance and Market

By Supa Upadhyay

Domestic money market:

The Average Weighted Discount Rate (AWDR) of 91-day Treasury Bills (TBs) rose sharply by 10 basis points to 5.44 percent compared to previous week. The rupee was traded higher at NPR 98.68 and lower at NPR 98.64 for 91-day TBs. The NRB had received 41 bids worth NPR 1639 million against the notified amount NPR 1260 million for 91-day TBs. The Repo rates for member banks and institutions have been quoted at 6.4430 for the trading days 26 February to 04 March 2002 for 91-day TBs. The outright purchase facility for bank, institutions and other on TBs is also available. In the regular weekly auction, the NRB is going to issue 91-day TBs worth NPR 890 million on February 26, 2002.

Domestic capital market:

The NEPSE Index-100 opened higher at 235.75 but dipped in all consecutive trading days and finally closed lower to 226.03, netting a significant loss of 8.59 points over the week. This week Development Bank and Insurance sector improved while Hotel Sector, Finance sector and Commercial banks lost. Business Sector and Production Sector remained unchanged. Out of thirty-seven traded companies, only eight companies improved, nineteen companies lost and ten traded companies remain unchanged at their previous prices. Nabil Bank, Nepal Development Bank and Oriental Hotel registered the first, the second and the third most traded companies trading 25226, 4490 and 2890 shares respectively. Shares of Nepal Bank Ltd, Nabil Bank, Standard Chartered Bank, Nepal SBI Bank, Everest Bank, NIC Bank, Bank of Kathmandu, Oriental Hotel, Nepal Merchant Bank & Finance, Nepal B’desh Finance and Nepal Development Bank were able to trade in all four working days. Likewise, National Life & General Insurance, NIDC Capital Market, Nepal B’desh Bank and Necon Air were able to trade in three working days.

Forex round-up:

The US dollar strengthened against all its major trading partners over the week. For the Euro, markets are very concern with the Eurozone data. Some state’s preliminary figures are due to publish. Italian data on Thursday disappointed the market by coming in slightly higher than forecast at 2.5 percent but French 4th quarter preliminary gross domestic product came in on the week side.

The Yen remained weaker, undercut by scepticism about how Japan will face up to its economic and financial sector’s problems. Dealers were also very much concern about a rumors that Japanese pension funds may restart purchasing large amount of foreign bonds from the beginning of April.

The INR closed weaker against the greenback as banks covered short dollar positions ahead of the weekend after state-run banks bought dollar late on Thursday. The NPR remains unchanged against the greenback over the week.