NATIONAL7Spotlight Weekly)]

An Assessment Of The Proposed Divestment Of The Nepal Indosuez Bank

By NIRANJAN K. TIBREWALA

The Nepal Indosuez Bank (NIB), a public limited joint venture bank with Banque Indosuez (now Credit Agricole Indosuez), was established in 1985. The agreement was signed between Ministry of Finance, His Majesty’s Government of Nepal and the Banque Indosuez.

Subsequently, the NIB was set up with three promoters: Banque Indosuez, Paris, Rastriya Banijya Bank and Rastriya Beema Sansthan. NIB was set up with the equity investment of about US$ 715,000 representing 50 percent by the Indosuez, US$ 215,000 representing 15 percent by the Rastriya Banijya Bank and US$ 215,000 representing 15 percent by the Rastriya Beema Sansthan. The Indosuez was to manage the bank and it was agreed that the NIB would pay to Indosuez a management fee of US$ 150,000 per year for the first 10 years and US$ 200,000 thereafter.

NIB has been in operation since 1986. The annual loan portfolio has been around US$ 20 to 30 million. The annual net profit (after tax) has ranged between US$ 1 million to 1.5 million. By comparison, the other similar types of joint venture banks in Nepal are operating at a profit of around US$ 6-7 million annually. Thus, compared to the performance of similar other joint venture banks in Nepal, the profit of NIB is low by about six to seven folds. Despite this, the value of the Indosuez investment has increased by five folds.

There are two main reasons of the relatively poor performance of NIB. First, Indosuez is a global wholesale bank whose expertise lies in project financing, aircraft lease financing, asset management, private banking, corporate banking, and foreign exchange management. Since such activities have negligible scope in Nepal, NIB was not able to take full advantage of its expertise and operate at high profitability. Second, the country's deteriorating economic situation may also be the reason.

Nevertheless, since its operation Indosuez has received about US$ 2.5 million as its management fee and about US$ 3 million in the form of dividends.

Rumors began floating in June 1999 that Indosuez was selling its holdings to one of the leading banks in Nepal. At that time, the Nepalese members of the bank’s Board of Directors were critical of the procedures followed by the Indosuez. The other promoters were entitled to exercise their right to purchase the shares of the Indosuez. Furthermore, Indosuez was requested to continue with its investment out of fear that divestment could have a negative impact in the economy, particularly in trying to seek foreign investment.

Indosuez agreed to continue provided its holding was increased to 67 percent (from the existing 50 percent). Consequently, all the concerned parties and the board members made efforts. The Nepal Rastra Bank also made its decision along this line and requested the Finance Ministry in January 2000 for the same. The implementation of the decision was, however, delayed due to frequent changes in the government and the ministry. The present Finance Minister, Dr. Ram Sharan Mahat, took the concern and commitment seriously. He took the initiative to have the Cabinet endorse the provision for the Indosuez to hold 67 percent of the share. This policy was also articulated in his budget speech for fiscal year 2001-2002.

Despite all these efforts made by the Government, Indosuez reconfirmed its decision to withdraw its holding. Indosuez managed to obtain a letter from the Nepal Rastra Bank that its two other promoters were not entitled to increase their present holding of 15 percent each. With this letter, Indosuez has in effect indicated that it will sell its holding to a third party. This is a procedural mistake, which is not expected from a highly reputed bank. It should not be the concern of Indosuez whether other promoters are eligible or not. Indosuez simply requires to issue a letter mentioning clearly the number of shares it wants to sell and the price of the share. In case other promoters refuse to buy, Indosuez should ask first to its board members to buy the shares and it has to follow the procedures set by the board. In this way, Indosuez could have got a graceful exit.

It is well known that Nepal is going through a very difficult period. It is trying to get out of a long political instability and put the economy on a solid path of progress. A highly reputed bank of the world came in Nepal as a positive gesture of the French government only with an investment of US$ 715,000. The current book value of its holding is about US$ 3.3 million. A bank of high repute should not leave the country at a time when it is passing through a difficult phase.

When Indosuez came to Nepal, it should have been fully informed that there was no scope for wholesale bank. The scenario has not changed. Further, the portfolio of the loan has been kept within the range of US$ 20 million to US$ 30 million. This limit is most probably set by the Indosuez on the basis of its own country risk analysis. This may be the reason why Indosuez did not expand aggressively in Nepal. At the same time, the Indosuez has pointed out the country’s poor economic situation as one of the reasons for its decision to divest. What Indosuez is proposing to do does no good to Nepal at present and there is a lot to be desired in the way the matter is being handled by the Indosuez.

(NK Tibrewala, MBA, financial expert and investor, served as director in the board of the Nepal Indosuez Bank from 1992 to 2000)