Vol. 3 :: No. 10 October, 2001 (Ashoj-Kartik)

Economy

Free Market Kleptocracy

Couple of years back, a Pakistani driver chauffeuring an American journalist in Islamabad told him why corruption in Pakistan fell behind Nigeria in global corruption index. That year, Nigeria became the first and Pakistan, the runner-up.

He said, it was virtually Pakistan that had topped the corruption list, however, Pakistani bribed Nigerians to secure the second seat for themselves.

Daniel Moi and his ruling mates became so incorrigibly corrupt that the IMF and World Bank had to draft an anti-corruption bill and hand him to push it through the Kenyan parliament before they could sit together for any further loan negotiation. The bill to rein in kleptocrats was drafted by World Bank officials that the Kenyan legislators were to push through.

The free market capitalism was born free but the moment it landed in the African and Asian soil, the country’s legal and regulatory systems perverted it into a free market kleptocracy.

Thomos Friedman in his book ‘The Lexus and the Olive Tree’ exemplifies the difference between the full-fledged kelptocracy and budding kleptocracy presenting two ministers, one from Asia and the other Africa.

While on a visit to Asia, the African minister is invited to the home of the Asian minister. Seeing the palatial residence of the Asian minister, the African asks, ‘ how can you afford such a home on your salary?’

The Asian minister takes his African counterpart to a big bay window and points to a new bridge in distance and says, " You see that big bridge over there?" Then the Asian minister points a finger at himself and whispers, "10 percent" signaling 10 percent of the cost of the bridge went into his pocket.

A year later the Asian minister visits African minister in his country and found that he lived in an even more palatial home than his Asian counter part. The Asian asks, " how can you afford such a home on your salary?" The African minister pulls his counterpart to the big bay window of his living room and points out at the horizon. He says, " Do you see the bridge over there". "No, there is no bridge there," answered the Asian.

"That’s right," the African minister said, pointing to himself, " 100 percent".

The kleptocrats ripping off the country and spiriting assets out of the country bolstering economies away from homes and impoverishing their own has been ugliest reality of Nepalese kleptocracy.

The likes of Daniel Moi’s team at home are said to have owned gasoline filling stations in an around American commercial centers, but their home villages may still have to wait for years to see a road linking them.

The country’s finance minister was hounded out by the opposition parliamentarians for his alleged bank account in the US a few years ago. They blocked the parliamentary proceedings unless the belligerent minister resigned.

One may never know how many aircraft, bridge, roads have been gobbled up by kleptocracy in the country but they can guess it from the palatial buildings, luxury pajeros and posh lifestyles of the politicians and a few bureaucrats.

Unlike the African And Asian ministers, practically no authority is there to ask them how they manage the whole thing on their 200 dollars monthly salary.

A year ago, David L. Pezullo, an American journalist, came to Kathmandu to speak on corruption. Those gathered to listen to him in the American Center auditorium included counter-corruption crusaders, handful of English language journalists and a few bald-headed intellectuals.

His half-an-hour long lectures ignited couple of questions in my mind which sadly went unanswered.

What can an impoverished country do when the multinational companies, the long-horn cattle in Friedman’s words, quickly get around the kelptocratic politicians and a few more holding rein of law and regulations to lay hands on the IMF, World Bank released funds?

How can the make-hay-while-the-sun-shines kleptocrats resist temptations of owning an account in Hong Kong, US or Canadian banks where the multinational agents promise to deposit their commissions in green dollars?

Back home, the multinationals receive a pat on their shoulder for bribing and making the deal for building dams, selling turbines and constructing the serpentine roads along the country’s rugged terrain. Kleptocracy in a country with a meager 200 dollars per capita is by no means discouraged, rather encouraged by free market capitalists.

Next, the role of media in unmasking and exposing the kleptocrats which Pezullo emphasized is again like donating sumptuous meal by a son to a Brahmin in hope that eating them by the latter would fill the stomach of his deceased father.

How can media which is financially dependent bring out independent views? And, if the said media have to lean on crutches of kleptocrats, can they possibly play the role that Pezullo ideally design for them?

The answers were a bit circumlocutory marked by forced optimism. The visiting American journalist said, a process should be underway aiming at a long time product.

The CIV (Corruption immunity virus) is running thick in the veins of poor countries impoverishing them further. One who can fight the CIV of the poverty-stricken world is again the capitalist west. If they all can rally behind the US in bringing terrorism to justice or justice to terrorism, why can’t they do the same in brining kleptocrats of our world to justice or at least justice to kleptocracy.

There is the difference! The terror virus attacked Pentagon and the twin tower of Manhattan rousing America and the West. The CIV is slowly impoverishing and killing the poor of the East.

So long the green dollars in commission is deposited in the western banks and invested there in stock market or other investment, or so long they swindle the country out and deposit there, the West doesn’t bother. Because, everyone is happy the way the system works: those in power here and those in power there.

The Attorney General’s report says, 7.4 billion rupees disappears and 3.8 billion remain to be paid back. The saber rattling Commission for Investigating Abuse of Authority (CIAA) has no noose to lower on kleptocrats and the people remain largely skeptical about judiciary.

The other day, Parliamentary Speaker Tara Nath Rana Bhat minced no words in telling that the politicians are corrupt and they receive kickbacks through administrators.

In a democracy where Speaker publicly says all politicians are corrupt what more is needed to fathom the undercurrents of kleptocracy.

The difficulty may arise in placing the country under the right category: full-fledged kleptocracy, budding kleptocracy or hybrid kleptocracy!

Let the people decide which of these labels they want to stick on their country.

I wish if kleptocracy could hit America and the West more catastrophically and rouse them once again against the global kleptocrats. That could possibly drive the last nail on kleptocracy.

Weaknesses of the Nepali Financial System

Weak Overall Position and Inefficient Delivery

Despite Nepal’s financial system witnessing large quantitative growth during the past decade, a host of challenges and complexities confront this sector. Prominent among them being the weak financial position of most of the state-owned financial institutions, with the situation in the commercial banks getting even murkier. Problems like weakening or negative networth, higher proportions of non-performing assets, large interest rate spread between lending and borrowing rates in the formal financial sector, predominance of the informal financial system in the rural areas, and high interest rate differentials between the formal and informal financial sectors of the economy have remained the major characteristics of the financial system of Nepal.

The depositors have not received relatively better interest rates while the borrowers and investors are also equally deprived of competitively beneficial interest rates. The large intermediation cost and the inefficiencies associated with the financial system have been the drawbacks of the Nepalese financial structure though the financial intermediation indicators point toward positive direction.. While it is reported that small depositors and entrepreneurs are discouraged from opening their accounts and carrying out transactions in joint venture banks, the two large domestic banks are also equally plagued by their inefficiencies along with all sorts of deficiencies in their dealings and transactions with their clients.

The Government’s Role

HMG plays a large direct role in the operation of the financial sector. From ownership of key financial institutions such as Rastriya Banijya Bank (RBB), Agricultural Development Bank (ADB), Nepal Industrial Development Corporation (NIDC), Provident Fund Corporation, the Grameen banks, the insurance industry, and two-fifths share ownership in Nepal Bank Limited (NBL) - to significant regulation over the activities of the other financial institutions also - the government’s hand is evident in almost every aspect of financial sector activity. This has resulted in strong political influence over the operations of most banking and non-banking activities. On the other hand, an inadequate level of supervisory and regulatory oversight has led to weaknesses, which need to be urgently addressed. There is thus the need for the government to re-orient its activities from being an active participant in the financial sector toward being a stronger regulator, catalyst and supervisor of the total system.

RBB and NBL

These two large banks account for 65 percent of banking system assets and more than 50 percent of the commercial banking deposits and loans. However, these two banks are in a very precarious financial position. Political intervention, weak management, poor financial information system and ever growing bad loans have tremendously affected RBB’s financial health. In the same way, NBL has also suffered from the overall inefficiency, a negative networth and low level of competitive strength in the banking system.

It is estimated that RBB, which represents 34 percent of the entire commercial banking system, has a significant negative networth - implying that its capital base is well below the levels required by generally accepted international norms of capital adequacy. Although in somewhat better financial condition, the NBL and ADBN have similar financial problems. This could have serious ramifications for the government in terms of systemic risk and could prove to be a severe financial strain on an already delicate budget should there be a crisis in confidence in any of these main state-owned banks - with concomitant adverse macroeconomic implications. Nepal’s financial sector, in general, suffers from the following nine attributes which are also identified to be HMG’s major concerns.

RBB

This bank is 100 percent government owned. As the largest commercial bank with more than 200 branches, RBB has a potentially important role to play in the economy. However, burdened with political demands, an active and disruptive union movement, management weaknesses, poor accounting and auditing functions, and bad loan recoveries, RBB has reached a particularly perilous financial state. Recent auditing work points to a high negative networth, weak internal systems, poor internal financial management, and shabby operating methods. At the request of the government, a diagnostic review of RBB and NBL was carried out by KPMG/Barrents in 1999/2000. This study’s major findings confirm that: (a) the banks’ management is basically dysfunctional; (b) there is no reliable data available on loan portfolio; (c) financial accounting is primitive and not according to international standards; (d) business strategies are not in place; (e) human resources policy is weak and counterproductive; (f) management information system and record keeping are very primitive; and (g) RBB’s governance and management are highly politically-driven and lack a commercial focus.

NBL

While in somewhat better financial condition, NBL is still a comparatively weak institution. Its large size adds to the overall inefficiency and low level of competition in the banking system. In keeping with liberalization of economic policy, the government’s share in NBL was disinvested to its staff and private sector which thereby reduced to 42 percent only. This disinvestment by HMG has been done with the objective of reducing the interference in the NBL’s management and promoting private sector participation in the bank so as to operate its business in professional manner. The government’s policy of successively selling its shares to the general public and the increasing private sector representation on its board have helped NBL’s financial status to some extent. However, the lack of a single strategic partner with a strong background in commercial banking, and international linkages with the global economy, has meant that NBL has not been able to play the pro-active market leadership role that could be expected from such a large bank. It also has the same problems as RBB, as noted above, and emerging problems of suspect insider lending/borrowing to private owners.

Reforming the State-owned Banking Sector

Reform of the state – owned banking sector should be designed to reduce fragmentation in the banking sector and increase the efficient intermediation role of the banks and non-banks. It is only by such actions that the government will be able to increase competitive pressures. Approaches should therefore be developed to enhance competitive climate rather than attempting some mandated efforts such as those developed with respect to controls on institutional growth. In addition, outside influences over RBB - as well as its sheer dominance within the overall banking system - also place this institution largely outside the influence and control of the central banking authorities. It may well be appropriate to implement a different model, which confers greater autonomy and independence to the NRB while providing it with full authority over the entire banking system. For example, the bank supervisors will need to be given the authority to be able to deal expeditiously and rigorously with insolvent banks - as the continued operation of such banks will only undermine the credibility of the bank supervisors. The bank supervisors must have a clear mandate to enforce effective compliance with rules and regulations as well as the mandate to ensure the exit of insolvent banks from the system.

NRB Report: Slight Rise in Inflation Rate

The first month of the fiscal year 2001/2002 has been marked with a decline in narrow money and a slight rise in broad money. Total government expenditure accelerated due mainly to higher growth in both regular as well as development expenditures. During the review period, resource mobilization grew by 13. 1 percent as a result of higher growth in revenue receipts. However, the growth of government spendings being higher than that of resources, a marginal budgetary deficit was observe during the review period. The rate of inflation went up slightly mainly due to a rise in the prices of sugar and related products, spices as well as oil and ghee despite a decline in the prices of grains and cereal products as well as pulses under the food and beverages group. In the external front, moderate growth of exports accompanied by a modest growth in imports helped to narrow down the trade deficit and subsequently the current account deficit during the review period. The foreign exchange holdings of the banking system increased substantially due to a surplus in the balance of payments emanating from the growth in net transfer income and official capital inflow as well as a decline in the trade deficit. The resulting foreign exchange reserve was sufficient to cover merchandise import of one year. In the share market, share transaction as well share price index declined compared to the previous month. In the money market, treasury bills rate remained at 4.78 percent whereas the inter-bank rate stood at 3.06 percent.

During the first month of the fiscal year 2001/02, broad money registered a growth of 0.5 percent (Rs 1006.3 million) amounting to Rs 214819.8 million compared to a decline of 2.1 percent (Rs 3850.4 million) during the same period of the previous year. An increase in net foreign assets of the monetary sector, compared to a decline last year, is attributed to the marginal growth in broad money. narrow money declined by 1.4 percent (Rs 992.3 million) during the review period compared to a decline of 3.9 percent (Rs 2376.1 million) during the same period of the previous year.

As a result of decline in credit flow to the government, total domestic credit of the banking system declined by 0.1 percent (Rs 187.5 million) during the review period as against a decline of 1.6 percent (Rs 2561.6 million) in the preceding year. The flow of bank credit to the private sector increased by 0.5 percent (Rs 649.2 million) during the review period in contrast to a decline of 0.1 percent (Rs 116.1 million) during the same period of the previous year.

On the fiscal front, total government expenditure registered a growth of 80.3percent to Rs 2967.7 million during the review month in contrast to a decline of 7.5 percent during the first month of the previous year. of the total government expenditure, regular expenditure increased by 116.6 percent to Rs. 942.9 million, development expenditure by 241.8 percent to Rs. 195.5 million and freeze expenditure by 58.6 percent to Rs. 1829.3 million. the salary hike of government employees in the previous year, payments of overdue amount on pensions as well as on medical care allowances to retired government employees and a substantial increase in the expenditures incurred for internal security are mainly attributed for such a rise in regular expenditure. Furthermore such a high growth observed in both the expenditures is also attributed to the low base of these expenditures due to abnormal situation in the previous year.

Revenue collection, the major resources for finance the budget, increased by 57.9 percent to Rs. 2914.0 million during the review period in contrast to a decline of 24.1 percent during the same period last year. As a consequence, resources mobilization grew by 13.1 percent in the review period compared to a growth of 3.9 percent during the same period in the previous year. However such resources mobilization remaining lower than the government expenditure, a budget deficit of Rs. 12 million was incurred during the review period. The government in addition to mobilizing foreign cash loan worth Rs 321.0 million, received Rs 9.0 million under the others heading of the government account and subsequently there was a surplus of Rs. 317.9 million in the Central Treasury during the review period.

The National Urban Consumer Price Index, on point basis, recorded a rise of 3.1 percent during the review period compared to a rise of 1.0 percent during the same period last year. Of the overall price index, price index of food and beverages group increased by 1.7 percent as against a decline of 4.6 percent in the preceding year. Despite sharp increase in the price of sugar and related products, spices, oil and ghee, restaurant meals and vegetables and fruits, the declining prices of grains and cereals products as well as that of pulses contributed for such a low price rise of food and beverages group. However, the price of non-food and services group increased by 4.8 percent during the review period as against a growth of 8.2 percent in the pervious year. The rise in the price of non-food and service group was mainly due to the upward movement in the prices of housing, transport and communication, medical and personal care, cloth, clothing and sewing services, tobacco, footwear as well education and recreation, Regionwise, the price index of services, tobacco, footwear as well education and recreation. Regionwise, the price index of Kathmandu Valley, Hills and Terai increased by 3.0 percent, 4.9 percent and 2.6 percent respectively.

On the external front, exports registered a decelerated growth of 15. percent to Rs 4494.3 million in the review period compared to a growth of 25.9 percent during the same period last year. During the review period, the growth of exports to India decelerated to 49.5 percent from 95.3 percent in the previous year whereas exports to third countries declined further by 13.6 percent as against a decline of 2.9 percent during the same period last year. Export of jewellery, woolen carpet and tanned skin to third countries increased whereas that of pulsed, Pashmina and readymade garments exhibited a significant decline during the review period.

During the review period, imports grew by 3.3 percent only amounting to Rs 8413.5 million as against a growth of 12.2 percent during the same period of the preceding year. The imports of vehicles and parts, chemical fertilizer, petroleum products, M.S. billet, M.S. wire, rod, and pesticides from India and petroleum products, betelnut, computer parts, camera, black pepper, P.V.C. compound, steel sheet, medical equipments, paper and silver from the third countries increased compared to that of the previous year.

During the review period, as the growth rate of exports remained higher than that of imports, trade deficit declined by 7.6 percent and remained at Rs. 3919.2 million as against a growth of 1.9 percent in the previous year. The export/import ratio which was 47.9 percent in the previous year improved to 53.4 percent during the review period.

Based on the available balance of payments statistics for the first eleven months of the fiscal year 2000/01, the balance of payments remained favourable by Rs 4279.9 million. During the review period, in spite of a decline in net services income, current account deficit declined by 5.0 percent amounting to Rs. 7539.7 million, due mainly to the decrease in trade deficit and an increase in current transfer receipts compared to that of the previous year. However, a substantial inflow of official capital net helped the balance of payment to remain positive. Based on the monetary statistics for the first month of the fiscal year 2001/02, the overall balance of payment recorded a surplus of Rs 1172.8 million. Subsequently, foreign exchange holdings of the banking system increased by 9.2 percent to Rs 106046.4 million. Of the total reserve, 75.5 percent was accounted for by convertible currencies and the rest by non-convertible currency.

In the share market, market capitalization of the companies listed in the stock exchange decrease to Rs. 43.96 billion at mid-August 2001 from Rs. 46.35 billion in the previous month. Likewise, NEPSE share price index decreased from 348.4 in the previous month to 322.1 at mid – August 2001.

R = Revised

P = Provisional

! = Quick Estimate. 

R = Revised

P = Provisional

! = Quick estimate

* = Identified Separatly from 1999, Oct/Nov.

AMC in Nepal A Step towards the Development of Financial Infrastructure

What is an AMC?

Assets Management Company (AMC) is a specialized financial intermediary to manage the non-performing and distressed loans of banks and non-bank financial institutions. The functions of AMC are to buy non-performing loans (NPLs) from the financial institutions and take necessary steps to recover the maximum value from the required asset. It deals with bad loans. Therefore, it is also called the manager of "Bad Banks". The concept of asset management company is one of the recent developments in the institutional structures to resolve the problems of non-performing loans (NPLs). However, the financial practitioners have introduced it in the early 1960s and the importance of the same was not widely recognized as it has been today. Many of the crisis-hit Asian countries have established AMCs with wide functional coverage to get rid of the NPLs problem that arose due to economic and financial crisis in late 1990s, and more importantly, they have been able to resolve the problem easily and timely. Consequently, nowadays, these economies have been able to restore the financial health and payment systems for the banks and non-bank financial institutions to boost up the economic growth.

The banking system needs to maintain high quality of assets portfolio all the time and adequate level of liquid assets to ensure uninterrupted payment system. When the quality of assets in the banking system deteriorates the level of non-performing assets rises and banks may face liquidity problem. If the liquidity crisis is severe, this may even lead in liquidation of the bank. Due to the recent financial and economic crisis, especially in South-East Asian nations, bank’s faced similar type of situation ultimately resulting in vulnerable level of non-performing loans on their assets total portfolio structure. In such a situation, most of the countries suffering from such crisis have realized the need for the establishment of AMCs in the direction to restructure the banking sector and resolve the problem of NPLs. These AMCs have served as the groundwork for banking institutions to recover its soundness.

From the specialization pint of view, to achieve the efficient performance from the financial system, financial institutions need to be operated within their specialized areas. That is why, many specialized financial institutions need to be incorporated that suit the nature of businesses and activities they undertake in the system. The nature of business that commercial banks undertake does not provide them adequate skill and expertise in handling and managing of NPLs efficiently. Therefore, the efficient managers of commercial banks prefer for disposing the NPLs as soon as possible with the objective of holding adequate level of performing loans all the time. This will help them to improve profitability and liquidity positions. Therefore, the management of NPLs has not been the core business for the commercial banks. On the contrary, AMCs, as specialized institutions, can perform the same task more effectively, efficiently and qualitatively at a relatively low cost in resolving the problems. Acquisition, management (restructuring) and ultimately disposition of NPLs of banks and financially distressed financial institutions have been the core area of business for AMCs.

AMCs are the most important institutions to improve the overall quality of assets of the financial system. AMC buys non-performing loans or distressed loans first and then tries to improve the quality of assets and disposes to the market. The basic approaches applied by the AMCs are ‘portfolio fishing’ and ‘portfolio trawling’. Viable loans are managed under first and non-viable under the second approach. These AMCs can carry out such assignment so easily by adopting various strategies to improve the quality of assets; e.g., debt restructuring, corporate restructuring, assets management techniques and speedy disposition of unviable assets. Moreover, the time factor is most crucial element while recovering the value of NPLs for both banks and AMCs. In this scenario, the speed of recovery is important because time element determines the value of recovery; i.e. the one rupee that has been recovered today will be worth more than one rupee to be recovered tomorrow. The experience of some crisis-hit countries clearly shows that AMCs are efficient in disposing assets in terms of value of recovery, if evaluated through the net present value calculations.

AMCs have been established in many countries in Asia, Europe, America. Especially in Asian countries; Japan, Indonesia, Korea, Malaysia, China, Philippine and Thailand have already established AMCs. India is in the process of establishing Assets Reconstruction Corporation. The following are the names of some AMCs incorporated to tackle the NPL problem.

The problem of NPLs has also been a burning issue in the Nepalese banking system since last few years. The level of NPLs has been recorded at 17 percent of total loans and advances of the banking system. The level of such NPLs within Rastriya Banijya Bank and Nepal Bank Limited have been estimated to be even higher than that of national average of the banking system. The tolerable level of NPL depends on the definition of NPL and requirements of provisions for such loans. Generally, level of NPA should not be in the double-digit figure. The level of NPL in the banking system is high in Nepal and this scenario has clearly revealed the urgency of establishing an AMC as soon as possible. Therefore, the sooner we establish the AMC, the quicker we can resolve the problem. In this context, Nepal Rastra Bank recently organized an interaction program in the participation of executive chiefs of banks and non-bank financial institutions, officials from FNCCI, Bankers’ Associations, Finance Association, economist, lawyers and distinguished personal of the country to explore the ideas for incorporation an AMC in Nepal. This can be regarded as one of the first efforts on the part of NRB for the development of institutional infrastructure of the financial system in Nepal.

Various AMC structuring models can be adopted in resolving non-performing and distressed loans. The choice of options for structuring an AMC basically depends upon the nature and type of NPL, the legal framework, role of the government, sensitiveness of the issue and power and mandate governing the functions of AMCs to solve the NPL problem. The structuring approaches could be any of the followings:

Government Agency

Government Corporation

Joint Venture Company

Independent Private Company

AMC can be incorporated as a single AMC in the national level or multiple AMC in both regional or national levels. So far the interest of the national level AMC, the role of the government seems to be desirable and is widely accepted even in high liberalized economies.

Comparatively, the AMC established as government agency/corporation can be empowered through strong legislative frameworks and strict mandate for smooth operation and qualitative results. Therefore, government corporations have shown better performance in comparison to other structures.

There are two extreme edges for the selection of standard AMC continuum. One edge goes to Rapid Disposition Agency and the other edge to Warehouse Agency types. The modality adopted under Rapid Disposition Agency type is RTC of the United States or FRA of Thailand. Pure Warehouse Agency type are of rare cases as all the AMCs need to dispose the assets at any point of time. The economic scenario and problems inherent to the financial system determines the appropriate type of continuum. More market driven ones, therefore, lie in the middle of these two extremes. The good examples of such types are Securum of Sweden and Danaharta of Malaysia. The approaches taken by Indonesia, Thailand, Korea were initially focused towards rapid disposition type but there existed the diversity of the problems too. For instance, in a country such as Thailand, where bankruptcy and foreclosure laws were relatively weaker, it made sense for them to dispose the assets via auction in a rapid manner simply due to sheer size of loan portfolio in terms of number of accounts. This is especially so since small loans including hire purchase contract and residential mortgage form a significant amount of assets, and would have been administratively difficult to manage such assets. KAMCO, which has taken a predominantly rapid disposition approach, is, to a certain extent, thinking of managing the NPLs, although their problems are manufacturing – inclined rather than property related as in the case in Malaysia. In Indonesia, where the banking system structure is fragile, an all-encompassing agency such as IBRA is needed to facilitate and implement the restructuring process. In Nepal’s case, AMC has to deal mainly with real estate, hotel business and manufacturing industries as the case is in Malaysia.

From the above explanations, it is clear that no two asset management companies are and can be alike. This is due to difference in circumstance and legal framework of each country. The comparison to determine which approach is the best would be an exercise in futility, but it is useful to compare the different approaches each country takes and to draw out lessons from their experiences. So far the Nepalese continuum is concerned, the Malaysian model can be adopted after some modifications.

Incorporation of specialized institutions such as AMCs is not an easy task. A number of issues can arise during the period from the establishment stage to the operational stage. The following are some of the basic ingredients that need to be addressed before establishing an AMC.

- Will to establish an AMC by bankers, other financial intermediaries, politicians, bureaucrats, economists, stakeholders and other concerned parties.

- Full support, commitment and participation of the government

- Emergency to get recoverery within stipulated timeframe

- Level of NPL in the financial system

- Nature of NPL in the financial system

- Type of NPL needed to be resolved

- Clearly spelt out objectives and needs

- Clear mission, vision and strategy

- Adequacy of Capital

- Adequacy of legal provisions

- Adequacy of technical expertise and proven professionalism of staffs

From the above explanation, it becomes clear that the AMC is a prominent force in dealing with NPLs in the financial system. Nepalese financial system does not have any institution that can undertake and manage NPLs and distressed loans of the banking system. Therefore it is the need of the day to establish an AMC as soon as possible. It must be noted that the

AMC should be capable of tackling the problems as well as be functional to the task assigned. It must be efficient, practical and solution oriented and enriched with professionals. Moreover, it should be capable of taking necessary steps to enhance the operating environment. It has been observed that in some countries, the government have been compelled to arrive at the stage of establishing national level AMC on state ownership, sooner or later. Therefore, AMC in national level on government ownership is seen to be effective in terms of economies of scale, efficacy and unbiased performance. So far the life of AMC is concerned, the government generally intends to establish with finite life to achieve quick recovery and to avoid moral hazards; whereas private sector seems to be more profit oriented, aiming at maximizing returns on their investment on the basis of going concern concept. Therefore, to sum up, it can be said that the establishment of AMC structure on government ownership, the board and management consisting only of professionals of the field, setting of transparent functioning procedures and adequate legal power to function it are the needs of the day.

Dhungana is a Finance Expert working as Deputy Director in Banking Operations Department, Nepal Rastra Bank.

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