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PUBLIC SECTOR BANKS |
The preliminary report by KPMG Group says the government-owned banks are in critical condition and need immediate rescue operation. But as "cold war" continues between the Ministry of Finance and the central bank, prospects of reforms of the ailing banks looks anything but bleak By BHAGIRATH YOGI Ram Kumar Bhadrapuriya, a little known businessmen, swindled nearly Rs 100 million from the Rastriya Banijya Bank (RBB) in the infamous Letter of Credit (L/C) scandal in 1995. Five years later, Bhadrapuriya still remains at large and the Bank is far from recovering its money.
The private-sector led Board of Directors of Nepal Bank Limited (RBB) tried to take action against its senior official Sher Bahadur Thapa on charges of providing loans amounting to billions of rupees to different parties, including Biswas Garments, in irregular ways. Not only majority of board members including representatives from the government and Nepal Rastra Bank opposed the move under influence from top politicians, anti-corruption agency CCIA sat on the file for nearly eight months and gave clean chit to Thapa. Employees at RBB welcomed the newly appointed executive chairman at their bank with 41-day long strike in 1996. The Chairman later rewarded the leaders of the agitating union with plum postings and other benefits. Welcome to the wild world of government-owned banks in Nepal that are "Free for All" provided you have right connections and know how the deal is finalized. You can walk away with millions of rupees for your fictitious project or take loans in the name of your family members to contest parliamentary elections. Never mind, there are very little chances that some bank officials will ever knock at your doors urging you to pay back the sum you had once taken. This is the exact picture drawn by KPMG Barents Group, a renowned international auditing firm, in its final draft report submitted to Nepal Rastra Bank, the central bank in the country, about the financial positions of these two Banks in March this year. Hold your breath to read the findings of the voluminous report the facts of which are no less than startling. "By international standards, both RBB and NBL suffer serious critical shortfalls in all key areas; both are technically insolvent," says the much-talked about report. Both the banks suffer from poor bank governance; political interference and private sector "self-dealing," lack of rational banking strategies- as well as the skills and "international banking experience" to support them, lack of independent, capable supervision, weak financial and management information, weak legal and accounting practices, said the report. Everybody knew that both these banks are not in good shape. But, very few would have been aware about the magnitude of the problem and seriousness of the issue until KMPG report was leaked to the press last month. "I can't say whether the report is right or wrong," Punya Prasad Dahal, executive chairman of RBB told SPOTLIGHT last week. "But the situation is not as worse as it is made out to be in the report." Officials resorted to damage control exercise as soon as these reports became public. "There is nothing to be worried about," said newly appointed Governor of NRB Dr. Tilak Rawal. "Though there are serious problems within the banks, it doesn't warrant actions something like closing of these banks." A strategy paper on financial sector reform program-- jointly prepared by the NRB, National Planning Commission and Ministry of Finance and presented at a seminar in the capital last week-- said political intervention, weak management, poor financial information system and ever growing bad loans have tremendously impacted on RBB to the very worse financial shape. Both RBB and NBL suffer from negative net worth, weak internal control and information system and poor financial management, said the paper. "There is an urgent need to initiate an appropriate plan to improve loan recovery and reduce non performing loans of these two banks," said Ram Babu Pant, deputy governor of NRB, presenting the paper.
Addressing the Nepal Development Forum meeting in Paris in April this year, Finance Minister Mahesh Acharya pledged his commitment to kick-start second phase of economic reforms. He also presented a document entitled "Priority Reform Actions" that outlines time-bound reform agenda in the areas including macroeconomic and fiscal structure, public expenditure management, private sector development and civil service reform. In the financial sector reform, the Minister has proposed, among others, restructuring of RBB and NBL with improved management, branch rationalization, improved supervision mechanisms, and privatization of the government-owned banks and non-bank financial institutions in the medium term (that is, within 24 months). Though some action has been initiated in this regard, whether the government will move fast enough to attain the targets set by itself are questionable. In the budget estimates for the year 2000-01 presented in the Parliament last month, Minister Acharya has allocated Rs 600 million to carry out institutional and structural reforms in the banking sector and improve the capital structure of commercial banks, Agriculture Development Bank and National Industrial Development Corporation. The Minister has also proposed to set up an Asset Reconstruction Company with joint venture between NRB and private sector to raise money by selling properties surrendered with the banks as collateral of debt that has now turned bad. "Acts including Debt Recovery Act and amendment in RBB Act will be presented in the on-going session of the Parliament with a view to bring about reforms in the financial sector," said Acharya. "The monitoring and supervisory capability of the central bank will also be strengthened through necessary amendment in the NRB Act." The private sector leaders also agree. "The NRB has to play a pro-active and effective role as a guardian of the financial institutions," said Narendra K. Basnyat, President of Nepal-USA Chamber of Commerce and Industry. "There is a need to gear up the management of the government-owned banks with thrust on loan recovery. The banks should come up with rehabilitation schemes if a project is due to reasonable cause. The approach of rescheduling the loans of big borrowers but closure of operations of small borrowers is not correct." According to Basnyat, businesses find it easy to access government-owned banks due to their huge capital base. "But there are questions about their maintaining stringent credit norms. So, the practice of providing loans under political influence must be stopped." While political interference and nexus between politicians, businessmen and corrupt bank officials are identified as main reason for the open loot of the bank property, weak supervisory and monitoring role of the central bank has also been blamed for the present state of affairs at the government-owned banks. "With one-third of resources of these banks turning into negative net worth, they can't honor the commitment of the depositors," said Shobhan Dev Pant, general manager of Nepal Arab bank Limited, a leading private sector bank. "Some responsibility has to be taken by the central bank that is supervising the banking sector for the last four decades." Those who have headed the central bank know where the shoe pinches. "Seven out of ten Governors have been sacked by the government in the past on the basis of loopholes in the NRB Act 1955," said Ganesh Bahadur Thapa, a former Governor. "There is a need of clarity in the NRB Act especially on the issue of tenure of the Governor." Added Himalaya Shumsher Rana, founder Governor of NRB, " There is a need to amend the NRB Act in order to make it a more effective regulatory and supervising authority." While the governments in the past have been expressing commitment to make NRB an autonomous body time and again, it has not come into effect as yet. So, the reform in the government-owned banks should come from within, say analysts. "The main reason for present state of the bank is corruption and irregularities," says advocate Lok Bhakta Rana, former chairman of NBL board of directors, who resigned from his post only a couple of months back. "So, first of all there should be a clean-up act followed by banking reforms." Reforming these two giant banks has become urgent in the context that they together mobilize nearly half of the Rs 145 billion deposits in the country'' banking system and have lent 55 percent of the total lending of nearly Rs 91 billion from the banking sector. Similarly, of the total bank branches in the country, 86 percent of the branches belong to these banks. Moreover, 93 percent of bank branches in rural areas belong to either NBL or RBB. The problems in these two banks are similar: lack of commercial orientation, poor quality of loan appraisal and lending practices, unsatisfactory loan recovery performance, stagnant/declining deposits, weak management information system and poor accounting practices. Moreover, over-staffing, growing trade union activities and less attention toward customer service are other features of these banks. Both NBL and RBB have more than 200 branches and nearly 6000 staff each all over the country. The oldest bank in the country, NBL was established 63 years ago with an authorized capital of Rs 10 million. The bank now has an authorized capital of Rs one billion and a reserve fund of Rs 500 million. The RBB was established 35 years ago with an authorized capital of Rs 10 million and paid up capital of Rs 2.5 million. Unfortunately, the cumulative loss of the Bank till 1998/99, according to a latest report published by the Ministry of Finance, stands at Rs 1.35 billion. The situation is such that any accident in the government-owned banks will bring disaster in the entire banking system in the country. As early as in 1988, the Commercial Banks Problem Analysis and Strategy Study (CBPASS) recommended that in order to upgrade the competitive ability and efficiency of the government-owned banks, two phase program be implemented for recapitalization of the two banks and reconstitution of strong loan recovery mechanism (See: Box). But the crucial second phase reforms that aimed at improving the capabilities of domestic banks were never taken up with earnest. "As a result these two banks continue to languish in the traditional system of management and control, and in the face of ever-growing competition from expanding number of joint venture banks with superior banking technology, the best clients seem to have deserted these two `old ships'," said former Governor Thapa. With the opening of the financial sector in the mid-eighties, the number of commercial banks has now reached 13, finance companies 46, rural development banks 5 and development banks 7 apart from cooperatives and NGOs doing limited banking activities. "This rapid expansion did some good to the economy but at the same time also created some anomalies and distortions of serious nature. More specifically, the government-owned banks and financial institutions have not been able to cope with the new challenges and opportunities," said Dr. Rawal. "It is time for us to act without much delay to tackle these issues maintaining a proper level of understanding between the government, NRB and the industrial and business community." Unfortunately, any such understanding at the level of top leadership at the Finance Ministry and NRB seems to be missing. The all-important seminar on financial sector reforms organized by the NRB last Thursday was conspicuous by the absence of top bigwigs at the Finance Ministry and National Planning Commission, including Minister Acharya. Insiders said Minister Acharya and Governor Rawal are not at the talking terms at the moment. (For starters, Minister Acharya had resigned from his post during the K. P. Bhattarai government early this year opposing the nomination of Dr. Rawal as NRB Governor and was later appointed to the same post by Prime Minister G. P. Koirala.) If the situation so continues, the agenda of urgent reforms in the banking sector will continue to be pending in the docks at Baluwatar and Bagh Durbar. And, the cost of indifference is going to be heavy. " RBB and NBL both are bankrupt banks. Sooner or later, they will become both insolvent and illiquid. When this happens, Nepal will experience a financial sector "melt down" or collapse, similar to the "Asia crisis" of recent years," says the KPMG report. "If no tangible action is taken, key donors are likely to interpret this as a lack of Government commitment and resolve to deal with some of the most fundamental problems in Nepal- with potential consequences for future assistance and aid commitments." The donors have already started taking note of latest developments. "While financial sector reform has been under discussion for many years, overall progress has so far been slow," says a recent report entitled "Nepal 2000 Economic Update" published by the World Bank. "The consultants' work has inter alia been hampered by inadequate support and staff resistance. Awareness of the need for these efforts among the top management of the banks concerned seems to be limited," said the Bank that is operating the Financial Sector Reform Project in Nepal with the Japanese assistance.
Experts insist that banking sector reform is something that should be the government's agenda, not a bitter pill to be swallowed under pressure from the donors. The reform in financial sector is not only essential for private sector development, it is equally important for ensuring macro-economic stability. "There have been positive impact of liberalization on the financial sector. Now, there is no dearth of capital to undertake viable projects for development activities," said Satyendra Pyara Shrestha, former Governor of NRB. "Now, the next strategy should be to institutionalize and consolidate achievements made so far and facilitate flow of resources in the productive sector." There may be room for argument over the exact situation of these two government-owned banks, but it is beyond doubt that both of them are in critical conditions. According to the KPMG report, the estimated losses inthese two banks is somewhere between NR 15-30 billion (US$ 220 to 435 million). These losses represent 4.5 to 8.5 percent of GDP of Nepal and between 24 to 45 percent of Nepal's total budget in 1999. "Addressing these problems will take political courage- and a lot of short term pain- for medium to long term gain. Unless something is done NOW- this situation will only deteriorate even further and will, sooner or later, result in an open financial crisis." For a comparatively small economy like Nepal, such a crisis would mean further socio-economic turmoil that may be too costly for the political dispensation and its leaders. Summary Of The KPMG Barents Group Report It is broadly recognized that Nepal's financial sector (RBB and NBL in particular) faces difficult systemic problems: - Poor bank governance; political interference and private sector "self-dealing." - Lack of rational banking strategies- as well as the skills and "international banking experience" to support them. - Lack of independent, capable supervision. - Weak financial and management information. - Weak legal and accounting practices. Diagnosis Assessment Area RBB NBL Governance and Management Politically driven/incapable Political/Private mix-very weak management Negative Net Worth (Insolvency) Rs 14-18 billion Rs 6-10 billion (preliminary) Additional fund required for CAR Rs 1.5 billion Rs 1.6 billion Human Resources Management Extremely weak Extremely weak Strategy Building, Planning No strategy, Primitive No strategy, weak budgeting/planning Budgeting/Planning Information Systems, Records Primitive, No valid Slightly better, but mostly primitive Plan to rectify - By international standards, both RBB and NBL suffer serious critical shortfalls in all key areas; both are technically insolvent. - While there may have been some temporary improvement after CBPASS, the situation is now clearly worse than 1992. Prescription (What to do?) 1. Demonstrate high-level commitment to an independent commercially-run banking system - Develop "all parties" agreement or clear unilateral declaration to de-politicize, de-unionize and commercialize the banking system. - Provide political and financial investment in an independent central bank with full enforcement powers. - Implement and enforce policies to foster sound banking. 2. Institute emergency measures to limit the damage at NBL and RBB - Place independent, professional bankers on Boards and in key management positions at both RBB and NBL. - Preferably an "International Bank Management Contract." - Otherwise, a "team" of professionals with common vision, practices, processes, systems, methods, etc. - Engage reputable audit firms to install proper record keeping, accounting, reporting and investigation processes. - Lay groundwork for streamlining and institution-building programs. 3. Design and invest in bank restructuring programs - Develop new, practical bank strategies and business plans. - Launch independent and result-driven recovery effort. - Implement approaches to rationalize and develop the banks. 4. Develop and implement long-range plans to correct environmental weaknesses - Raise accounting standards and overall transparency of financial information (for banks and borrowers). - Design and implement a comprehensive legal reform program that supports modern commercial banking. - Set clear, national standards for ancillary professional services (e. g., land registry, appraisals, etc.) Problems in the Banks The problems in NBL and RBB are FAR WORSE than anyone thought; The financial problem in NBL is as worrying as the problem in RBB- both are bankrupt banks; Management is not in control and does not appear to be particularly concerned about this fact; Politically motivated loans to big borrowers almost always "go bad"; Union activity is disruptive and "out of control" in the banks; The estimated losses in these two banks is somewhere between NR 15-30 billion (US$ 220 to 435 million). This is the responsibility of the shareholders of these two banks; These losses represent 4.5 to 8.5 percent of GDP of Nepal; These losses represent between 24 to 45 percent of Nepal's total budget in 1999. Addressing these problems will take political courage- and a lot of short term pain- for medium to long term gain; Unless something is done NOW- this situation will only deteriorate even further and will, sooner or later, result in an open financial crisis. Political challenges - No more politically motivated loans; - Need to deal with highly politicized and disruptive unions within the two banks; - Need to deal sensitively with the issue of bank branching- particularly in rural areas; - NBL shares are NOT an asset. The shareholders in NBL no longer "own a bank." Immediate steps to be considered - "All parties agreement" on the de-politicization of the banking sector. If this is not possible- a Nepali Congress commitment; - New bank management team to be recruited to go in and take over RBB and NBL immediately; - Send in accountancy firms to both banks to develop accounting capacities and provide internal audit; - Declare banks "essential services" so that workers cannot strike and begin a retrenchment program. Medium-term Actions - Shrink RBB/NBL and "carve out" a good book from the bad bank- and privatize it; - Bad assets turned over to an Asset Resolution Trust to make rigorous efforts at recouping funds. What will happen if action is not taken? - RBB and NBL are insolvent- both are bankrupt banks. - Sooner or later, they will become both insolvent and illiquid. - When this happens, Nepal will experience a financial sector "melt down" or collapse, similar to the "Asia crisis" of recent years. - Nepal can act now in the "Pre-Crisis Period"- or wait for the crisis to arrive, but losing critical room for maneuver and paying a higher price at a later stage. - If not tangible action is taken, key donors are likely to interpret this as a lack of Government commitment and resolve to deal with some of the most fundamental problems in Nepal- with potential consequences for future assistance and aid commitments. What support can the donors give? - This process will not be easy. Donors must stand prepared to support a Fully Committed Government; - This could possibly include resources for Golden Handshakes to workers being retrenched; re-training schemes for retrenched workers; and some funding for recapitalization. Benefits from Decisive Action - Nepal can avoid financial crisis, instability, and starkly reduced levels of per capita national income, business failures, and loss of political and economic control (as in Korea, Thailand, and Indonesia). - It will lead to a better performing, privately owned, banking system in Nepal which, if properly supervised, will be able to support faster, private sector led growth; - It will send an impressive signal to both domestic and international audiences that the Government is willing to tackle very difficult governance issues; - It may result in additional donor assistance in support of a committed Government and a stronger national economy. Excerpts from KPMG Barents Group report on RBB and NBL: Preliminary Observations (March 2000) Implementation of CBPASS Report To evaluate the current financial position of the two state owned banks , namely NBL and RBB in the third year of the Structural Adjustment Facility (SAF) in 1989/90, a study named Commercial Banks Problem Analysis And Atrategy Study (CBPASS) was conducted under the financial support of the UNDP. The study recommended a series of corrective and preventive measure to improve their financial performance. The CBPASS report suggest a number of measure to help improve the financial health of these two banks. The principal recommendation implementation are as follows. 1.Recapitalisation of the state owned commercial banks To implement the recommendation of the CBPASS report, the government provisioned a supplementary budget of Rs.3.45 billion in 1991.Of this amount, Rs.331.6 million was used to recapitalise the two domestic commercial banks; Rs.116.3 million for NBL and Rs.215.3 million to the RBB. As NBL is partially government owned, NRB underwrote Rs 111.7 million for the required share of the private sector. 2. Government Guaranteed Loans Repaid in the past, commercial banks had provided credit to the government enterprises against the government guarantee. Such loans had remained overdue for quite long. As a result of this, the financial position of commercial banks continued to deteriorate. Therefore, as per the CBPASS reports, Rs 1.9 billion was allocated to repay government guaranted overdue loans to public enterprises. 3. Introduction of Provisioning Other than the government guaranteed overdue loans, commercial banks' loans to public enterprises and the private sectors had also been non-performing. According to new rules of loan loss provisionining, such loans had to be provisioned. Therefore, government earmarked Rs 1.2 million for the provisioninig of bad abd dountful loans to public enterprises and the private sector. (Source: Economic Liberalization in Nepal: Sequence and Process, Nepal Labor Academy/Oxfam G-B Nepal, 1998) 'The NBL Is Being Raped By Power- That- Be' — LOK BHAKTA RANA
A long-term member of board of directors of Nepal Bank Limited, advocate LOK BHAKTA RANA was elected chairman of the Board last year. He, however, resigned from his post two months back citing ěhousehold reasons.î A strong votary of reforms in the banking sector, Rana is still one of the influential members in the NBL board. Follows excerpts of an interview: How would you react to the KPMG report? Itís not a final report and is based on specimen cases only. It has been conducted according to KPMG standard. If the same standard were applied, almost all the banks in Nepal would be termed as technically insolvent. All I can say is the NBL is not on the verge of bankruptcy. Do you mean that NBL is out of danger? There have been attacks on NBL and RBB from all quarters. The elites of our country always protect joint venture banks as these are the banks they offer lucrative jobs to their kiths and kins. NBL is being raped from powers-that-be. The government has barred us from acting independently. When the ruling party leaders are intervening in our activities, how can the bank perform in an indepent way? Politicians take loans in the name of their relatives during elections. It is even reported that money was been taken from the bank during the coalition era to form or pull down governmetns. So, what did you do to check such irregularities? I did not get support even from my board members when I iniaited action against alleged corrupt officials within the Bank. The chairman has got no power in the Board. So, the government should think of appointing an executive director or executive chairman to head the Board. Why is that there was no improvement in NBL even after handing 40 percent of the government equity to private sector? The private sector too has failed to perform in a professional way. Most of the board members represent either one or the other business groups. Often there is rivalry going on between them. What should be the role of the government? The government should appoint honest and professionally capable people as members of the Board.It would be better if these people are independent, rather than the government employees. The Finance Minister has good intentions toward this bank. But that is not enough. From where the reform in the bank should start? Rampant corruption and irregularities are responsible for present state of affairs of the Bank. So, a clean up program should follow the banking reform programs. If the governmetn is committed, the clean up act can be accomplished within a month. No foreign partner would come in unless the present mess is cleared. So, there is an urgent need to maintain internal order. KPMG is the global professional advisory firm with more than 100,000 people collaborating worldwide, the firm provides consulting, tax and legal, financial advisory and assurance services from more than 820 cities in 159 countries. The letters which make up the name KPMG stand for one of the firm's four founding members. The story behind each of these names provides a brief history of the firm and its development through the past century. K is for Klynveld. In 1917 Piet Klynveld established the Dutch accounting firm later known as Klynveld Kraayenhof & Co. P stands for Peat. Sir William Barclay Peat founded the accounting firm William Barclay Peat & Co. in London in 1870. M is for Marwick. James Marwick founded the accounting firm Marwick, Mitchell & Co. with Roger Mitchell in New York City in 1897. G stands for Goerdeler. Dr. Reinhard Goerdeler was for many years chairman of the German firm Deutsche Treuhand-Gesellschaft. (Based on KMMG's website www.kpmg.com) ‘The Bank Is Not Going To Close Down’ — PUNYA PRASAD DAHAL
Executive Chairman at RBB, PUNYA PRASAD DAHAL says he believes in the philosophy "Do thy work the reward is not thy concern." The seasoned bureaucrat-turned-banker spoke to SPOTLIGHT on the related issues. Excerpts: How would you comment on the KPMG report? I can't say whether it is right or wrong. Of course, there are some weaknesses at this Bank. But they can be improved. The bank is not going to close down whatever the reports say. Depositors should not worry from such reports. We can jump again within the next two years through appropriate reforms. So, is everything alright? Look, people have immense faith upon us. There haven't been any panic even after media reports on the financial status of RBB. Now, we have put all our efforts on recovery of loans. We have restructure our Debt Recovery unit on the basis of CBPASS report. Once the Asset Reconstruction Company is set up, the situation will start improving. Things will be much clear after the audit of the year 1998/99 gets completed. Is political interference responsible for the poor state of the Bank? I would blame the people in the organization rather than the government. Officials in the bank are equally responsible for any wrongdoing in the past. What is your reform agenda? Since my appointment six months back, I have given top priority to improve efficiency of our manpower. Similarly, maintaining transparency and taking the Bank toward profitability are other priority areas. We have also given emphasis on improving quality of the services, good project appraisal and credit audit. Both the Finance Ministry and NRB are committed toward reforms. So am I. Now, I am encouraging the employees here to support the reform agenda. |
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