NATIONAL8 (Spotlight Weekly]

Time For Reforms

The government's call for managing ailing banks gets encouraging response but implementing it may not be so easy

By BHAGIRATH YOGI

As the deadline for application for international companies to manage two giant Nepali banks ended by the mid-night of October 31, there were about 50 consultant and management groups competing for the bid. Reputed international companies including KPMG Barnet, Arthur Andersen, Deloitte and Pouche, Price Water House Coopers (PWC) and Earnest and Young International-- all in the panels of World Bank -- were also in the race. The applications came in response to September 30 advertisement (published in the prestigious "The Economist" magazine) by Nepal Rastra Bank saying that the government wanted to hand over the management of two largest banks in the country to foreign companies of international repute initially for two years. The applicants also included management groups from Singapore, Malaysia, Sri Lanka, India and Nepal (in association with foreign consultants). The contract is part of the Nepal Financial Sector Reform Project supported by International Development Association, lending arm of the World Bank. These consultants will be paid from the World Bank loan for the project.

Nepal Bank Ltd. : Change of guards in the offing

The project aims at reforming state-owned banking giants-- Nepal Bank Limited (NBL), the oldest bank in the country and Rastriya Banijya Bank (RBB). The government has already sold its majority stakes in NBL.

According to officials, the international management team will be responsible for taking complete control of day to day running of the banks, providing immediate help to stabilize the banks' operations and restore their financial health to an acceptable level. Such a team will work in close cooperation with a locally recruited accountancy team to develop and strengthen the accounting capacity of the banks, develop a comprehensive human resource policy and designing and implementing an information technology plan for these two banks.

The government decided to hand-over the management of these banks to foreign companies after a study by KPMG Barnet Group, an international audit firm, said both NBL and RBB were "technically insolvent," or bankrupt.

The report, submitted to the NRB early this year said the lending process, loan files and the loan portfolio of both these banks were deeply flawed. The report, which is yet to be made public, claimed that the net negative worth of NBL was in the range of 6-10 billion rupees, while that for RBB was estimated in between 9-15 billion rupees. The combine losses of the two banks represented 4.5 to 8.5 percent of GDP and 24 to 45 percent of the national budget in the year 1999.

Poor bank governance, political interference and private sector "self-dealing" were also responsible for the poor health of these banks, said the report. The report had recommended to place independent, professional bankers on Boards and in key management positions at both RBB and NBL and preferably hire an "International Bank Management Contract."

"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," the report warned.

Though major political parties have yet to make their version public regarding the government's move to reform the banks, employees at both the banks and management at NBL have found themselves in an awkward position. "We don't know anything officially as yet regarding the government's move," said advocate Lok Bhakta Rana, one of the private sector directors of the NBL. "The NRB's act of inviting foreign management at the banks is likely to land in a legal tangle as there is no legal basis for awarding the management contract to a foreign company (companies)."

RBB

Employees at the Banks are equally vocal. "Handing over the management of these banks to foreign companies is no solution to existing problems. Whether we will cooperate the new management or not depends on what will be their conditions and what process will be followed while awarding the management contract," said Prakash Chandra Mukhiya, President of RBB Employees Union. "In any case, we will not support the move to fire the employees or restrict the rights of the trade unions." At present, there are three employee unions at the NBL and couple of unions at RBB.

The government, as such, will have to move forward honoring the sentiments of the parties concerned, say analysts. In any case, reforms at these banks have become urgent looking at their poor health and huge financial structure. Out of the total asset of nearly Rs 44 billion, the RBB has a loan portfolio of more than 20 billion rupees and mobilizes deposits amounting to Rs 27 billion from general public and business community. Similarly, out of total assets of Rs 34.2 billion, the NBL has a loan portfolio if Rs 18 billion and has deposits worth Rs 28 billion.