Nepal Bank Limited:

A Victim of Mismanagement

By Jagdish Agrawal

KPMG Barent, an international audit firm, had conducted a study on financial status of Nepal Bank Ltd. Though neither the study report is made public nor I have any access to the report, abstracts of the same were published in newspapers and weeklies, according to which some amazing and shocking information about the bank have been brought to the fore. Total liabilities of the bank is reported to be greater than total assets by Rs. 6 to 9 billion. The so-called secured loans are said to be secured only partially or not secured at all. Big borrowers are shown as not only the main defaulters, but also as the ones who have command over the management of the bank. Those loans were being provided without fulfilling even minimum requirements customary for a bank, and in case of default, necessary actions were not being taken to recover the principal and interest.

The news became a matter of worry for the general investors. Some of them became much frustrated and started off-loading the stock even for a price as low as below Rs. 300. But there also are some who have little belief on the report, and are so purchasing the shares.

It indicates that the investors are divided in two groups. Let us analyze their perception of the situation.

Both the groups have no access to the current information about the bank, so they have to depend on the abstract of the report, general market situation, general tendency of government employees, and the published annual report of the bank as on Ashadh end, 2054 (mid-July 1997).

As per the latest annual report of the bank, the total loan including bills receivable was of Rs. 16,760 mio. In my rough estimation the amount of fully secured loans (i.e. against gold, silver, government bond and shares, and priority sector loans, etc) were of Rs. 3879 mio. The amount in shape of loan with big houses was of Rs. 2740 mio. And other loans were of Rs. 10141 mio. Thus the partially secured loans come to Rs. 12881 mio, out of which, as per the report, about 40 % only was secured and balance of Rs. 7729 mio was unsecured. Even if we consider the personal guarantee of a third party and/or of directors taken at the time of granting loan, the deficit will be no less than Rs. 5 billion. The loan loss provision made upto the period of the balance sheet prepared for the date Ashadh end, 2054 was of Rs.1141 mio. Even with this, the deficit remains at about Rs 4 billion, which may be set off against the operating profit of at least four more years. It means there is no chances of net profit during coming at least four years. Hence the share price of NBL nose-dived to Rs. 273 from Rs. 335.

The second idea that the report is only partially true is also not against the above calculation. But the believers of this idea thought that the loss could be compensated against the heavy amount of hidden reserve of the bank. The hidden reserve is created by showing at cost the bank’s investment in shares of different other companies. In my calculation, the amount of investment in certain shares which was shown at Rs. 107.15 mio in NBL’s balance sheet, is valued at Rs. 1005 mio if calculated at their current market price minus 20%. Thus, the shares alone create a hidden reserve of Rs. 898 mio. Though we cannot assume the fair market price of the fixed property held by the bank, it is well higher than what is shown in the bank’s balance sheet. Total amount of fixed property shown in the balance sheet is Rs. 138.81 mio. It is less than the fair market value of land and building situated at New Road, Kathmandu alone. This group of people also believe that the big houses shown as defaulters in the report have their own reputation and are not even near to insolvency. So the loan to them is fully secured. Their next valid point is about the provision made in balance sheet for interest suspense account of Rs. 1795 mio. As per them this amount is not totally unsecured and thus recoverable at least in part.

Both the ideas are focusing on the worst situation of the bank, but one of them is still positive in its outlook. I would also say that the KPMG report is not a post mortem report of the bank right now. However if measures to recover from the situation are not taken immediately, it shall be a post motem report.

Before framing a remedial action plan, we have to have a look on the reasons responsible for the situation.

1. Even in case of production loan, a project report prepared by qualified persons is not made a compulsory document to be reviewed before sanctioning the loan. Even if it is produced, the banks (NBL & RBB) have no competent mechanism to evaluate it.

2. Even if the loan is provided on the basis of a project report, once the borrower is not able to pay interest and/or principal in time, there is no in-depth study carried out about the reason of the default.

3. The most important factor about which the least consideration was given by bank was the method of valuation and verification of the movable and/or immovable property offered as collateral against the loan. Generally, valuation is done by a bank employee who has no degree, diploma or even training related to this job. Neither is the legal status of property evaluated. The primary data concerning the property’s location, marketability and accessibility are seldom collected in writing. Moreover, the officer making the valuation is never made responsible for any degree of variation between the valuation made by him and the actual value of the property. That is why worthless property is valued for millions. On the top of that, once a property is accepted for collateral it is never verified whether it is maintained at a satisfactory position or not.

4. The bank is never worried about a default on interest or principal repayment. The correspondence with the borrower and the guarantor is negligible. That is why the borrower or the guarantor does not think it as a part of his duty to pay the installment in time.

5. If the various newspaper reports are not false, the valuation of the property is done with vested interest of the bank officer and such vested interest does not allow him to take effective action against the borrower.

Prices of Nepal Bank were as follows:

(Agrawal is a CA and one of the prominent stock-brokers in Nepal Stock Exchange)