By Diwakar Golchha

When economic liberalisation started in Nepal, during the late 80s and early 90s, major investments were made in some new areas under manufacturing, hotels, airlines etc. The gestation period for such investments was prolonged and some of these major investments are now having cash flow problems due to some internal and external factors beyond the control of the investors. At a time when everything looked rosy, banks were pushing loans, ready to finance projects without properly analysing their financial viability. The investors were also too eager to take loans and invest. When thing started to get tough, almost everything else has toughened up.

Until the 80s, the Nepal Bank Limited and Rastriya Banijya Banks were regarded not merely as professional banks, trying to maximise returns to the shareholders. They were seen as agents of change - an alternative to traditional moneylenders and were forced to open branches in rural areas, where there were no financial viability. The pressure was on expansion. They did not pay any attention to modernisation. Also the political pressure to accommodate the cronies of the rulers of the day is to be blamed for their over-staffing. The manpower was poorly trained in the modern day financial system. After liberalisation and development of the new joint venture/private banks there was a shift in the banks' focus and they have become more profit oriented.

Institutions for long term investment

Now with the virtual demise of the NIDC, there is no proper financial institution or agency in the country to help start the green-field projects with medium and long gestation period. The new so called 'development banks' are small and are confined to consumer financing.

The primary and secondary capital markets are still underdeveloped. Besides, the rules do not allow floating of shares at the initial age of a company. Therefore, the bankers' role as providers of finance becomes very important. If the commercial banks do not play a positive role in the promotion of business in the country, economic activities cannot expand any further resulting in excess liquidity in the system and depriving individual depositors of a decent return on their savings. This situation has already started emerging in the system. The interests on deposits are not enough to cover inflation. This has not, however, resulted in cheap finance for the industrial sector. This is a serious challenge for the future as it will discourage savings as well as investment.

The bankers' attitudes in Nepal is similar to that of moneylenders and the kind of papers, bonds and guarantees one has to sign while dealing with banks are numerous and one sided and in most cases they also violate the concept of limited liability and reduce the risk taking capacity of borrowers.

Protection to the banks vis a vis borrower   

There is no proper legislation in Nepal which gives such protection to the borrower as Chapter-10 and 11 provide in US. One law was proposed by the government in the name of the Bankruptcy Act, some two years ago, but the same is still to come into practise. On the other hand, the banks are given much protection by the law as well as by the central bank by issuing different directives. The banks can very easily take over the mortgage and recover the loan but they still cry foul and blame the real sector for all the non-performing loans.

The interest rates charged by the banks to the real sector are quite high. On the one hand we see the same banks investing billions of rupees in Treasury Bills for about a quarter percent interest, on the other hand industries are being charged 10%-12% or even more.

Consortium Loan

When the borrower of a consortium loan needs some additional fund to meet some emergency requirements, the consortium banks normally do not want to meet such requirements under one or another pretext and the non-consortium banks are restricted by the NRB directives from investing in such businesses.

Single borrower limit

A single borrower as mentioned in the present Nepal Rastra Bank directive is complicated and unjust. Logically, the single borrower limit (SBL) should be confined to an individual operation as it is a legally independent body. Even the companies listed in the stock exchange are being dragged within a SBL.

Problem of NPA

The NPA of the three banks (NBL, RBB and NIDC) are highly discussed and publicised. If we analyse them, we can find that the NPA of these banks have been created over the last five to six decades. Although these banks have also made the required loan loss provisioning over the same period, high and improbable figures of NPA are still often quoted. There are many companies which suspended their businesses one or two decade ago, but the banks are still carrying their loan account as NPA in their books. They should have the guts to either foreclose on the collateral or write the loan off in such cases.

Blacklisting

These days the government, probably under pressure from donors, seems to think that bank loan problems are the only and biggest problem of the country. They completely ignore the much bigger economic crisis being faced by businesses and are taking tough measures against businesses in a one-sided way.

Nepal Rastra Bank has issued a separate directive regarding 'Black Listing'. The directive does not differentiate a wilful defaulter from other borrowers who genuinely want to repay loans but are facing problems due to the bad state of the economy.

Industries are always subject to ups and downs during the course of business. If the industries perform well many people are benefited and everybody is happy but if it does not perform well then it only the promoter/entrepreneur who has to suffer.

If Nepal Rastra Bank and the donors think that Blacklisting is the only way to recover loans then it is very hard to agree with that policy. The focus should be on enabling the entrepreneurs to repay the loan rather than on putting them behind bars or making them incapable of returning the loans.

Banks have reaped profits from businesses and are still the only sector making profits. They must also face the consequences of the bad business environment of the country. They should also share the consequences of their past wrong decisions. The kinds of protection and support they are receiving is very unfair.

Restructuring of Sick Units

NPA can be classified mainly into two categories:

i.                 Borrowed money never used for the objective it was borrowed for or the loan transaction was done with a fraudulent objective. 

ii.                 Borrowed money actually invested to create business but the company could not perform due to internal or external factors other than those envisaged during the designing of the project. In such cases the investor along with the bank is genuinely in problem and it should be looked upon accordingly. The promoter should be helped with a view to support and restructure such businesses.  

Several models can be developed keeping in view the past track record and future business potentialities of the second category defaulter. One the major components in the costs of a business is the finance cost. In the 90s the interest rate used to be 15%-18% and it was never revised as per the market rates. Once the company was caught in any sort of cash flow problem, the interest could not be serviced. Such types of accumulated interest was converted into principal loan amount and, understandably this can not be sustained. Therefore, while restructuring bad loans there should be proper consideration regarding what debt the company can carry and service. Such interests could be frozen for a period without carrying interest on such interest. Such interest as well as the interest for the frozen period and penal interest should be waived when the borrower successfully services all other debt obligations.

The interest rate should be fixed at a reasonable level for the future and the period for repayment of principal should be decided upon the basis of past performance and future cash flow possibilities. An excess of optimism will create future problems.

Role of Central Bank

As the Central Bank of the country NRB should play a vital role in improving the overall environment and employment generation as did the Federal Reserve in the US after 9/11 to boost its economy.

(Golchha is the Second Vice-president of FNCCI and this article is based on the speech he made at  the Bankers Conference 2004)