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COVER STORY |
NBL & RBB After last year's damning revelations by the international auditing agency KPMG Barents Group about their state of financial disarray, the two old war-horses of Nepal's financial sector - Nepal Bank Limited and Rastriya Banijya Bank - are facing fresh reform attempts. The latest prescription: leasing their management on contract to foreign experts. Although there is stiff opposition to this proposal - which also has a Swadeshi-Vs.-Videshi dimension, there seems to be no other viable alternative. Moreover, with the kind of losses these banks are accumulating, can the country afford to continue with a few patch-up efforts? By SANJAYA DHAKAL As officials at the central bank were working in full speed in their plans to lease the management of two government-controlled banks to foreign experts, the employees of the Rastriya Banijya Bank (RBB) were raising slogans in the streets on Monday against what they called a "sell-out". Their counterparts at Nepal Bank Limited (NBL), too, are rolling up their sleeves to prepare for a showdown with the government against the proposed management contract. Every time there is a talk of reforming these two giant banks, it causes a storm in the country. Whether it was the implementation of the recommendations of the Commercial Banks Problem Analysis and Strategy Study (CBPASS) in 1988 or demands to clean up irregularities reported to run rife in the institutions, each move has met with tremendous pressure from several quarters.
Last year's report by a reputed international auditing agency, KPMG Barents Group, which went so far as to term the two banks "technically insolvent", caused a political and financial uproar in the country, with everybody clamoring for some concrete move to prevent them from hitting rock bottom. Although there is a consensus among all political parties, employees' unions, authorities and board of directors of the banks on the need to reform these two institutions, the differences of opinion become sharp when it comes to the nature of the remedy. Naturally, the current government move to lease the management of the banks to foreigners is meeting fierce opposition from employees, opposition parties and a section of bank officials themselves. However, Nepal Rastra Bank (NRB) - the central bank - and the Finance Ministry seem resolute in pushing ahead with their agenda. The World Bank has agreed to provide around Rs 1.5 billion in loan to cover the expenses of leasing the banks' management. Last April, then Finance Minister Mahesh Acharya had promised at the Nepal Development Forum - a consortium of foreign donors - in Paris to start the second phase of economic reforms. In the financial sector, among others things, Acharya had proposed the restructuring of the RBB and the 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). Following Acharya's pledge, the government published a notice in The Economist magazine in September, 2000 inviting international bidding for awarding the contract for management of the two banks. At present, the central bank is short-listing the bidders in close cooperation with the bank officials. In the case of the NBL, the NRB has already short-listed four candidates -- Price Waterhouse (India), Ernest Young (Sri Lanka) and two others including Development Partnership from United Kingdom.
The government believes that the foreign management will be able to turn around the banks' financial situation by bringing with them required skills and technological know-how in loan recovery, credit flows, human resource management and investment. "In the present scenario, there is no alternative to improving the performance of these banks other than handing over their management on contract," NRB Governor Dipendra Purush Dhakal told SPOTLIGHT. "The country's Gross Domestic Product could register a growth of an additional 2 percent by carrying out financial-sector reforms alone." Agrees Punya Prasad Dahal, executive director of the RBB. "If we could use their expertise to our benefit, this could prove good," said Dahal (See box). State Of The Banks Why is the financial situation of the two commercial banks so important for the country? The answer lies in their size, volume and area of operation. Between them, the two banks mobilize nearly half of the Rs 145 billion deposits in the country's banking system. They have lent 55 percent of the total lending of Rs 91 billion from the banking sector. Similarly, of the total bank branches in the country, 86 percent belong to these two. They operate ninety-three percent of bank branches in rural areas. The RBB alone contributes 25 percent to the total deposit collection and 30.1 percent to the total credit flow. Given their ubiquitous presence, they are literally the mainstay of the Nepalese banking sector. "Any serious damage to these banks can invite a financial sector meltdown in the country," said Prof. Dr. Biswombhar Pyakurel, a former member of the board of directors of the NBL, who now serves as executive chairman of the Nepal Industrial Development Corporation. At present, the two banks are in a serious financial problem. According to the KPMG report, their combined losses are somewhere between Rs 15 billion to Rs 30 billion - which represent 4.5 to 8.5 percent of the GDP of Nepal. Says Pyakurel: "Although the deposit collection of these banks rose by 15 percent in the last nine months, the credit flow rose only by 9 percent, as compared to 14 percent in previous year. This is not a healthy sign." But top officials of the banks downplay the situation. "We do not have operating losses. The problem we have is in loan recovery," said Dahal. The bad debt of the RBB amounts to Rs 910 million in principal and over Rs 3 billion in cumulative interests. "As ours is a big bank, it will not be difficult for us to sail over the present losses," Dahal said. Rajendra Khetan, a leading industrialist and a member of the NBL board of directors, believes that the bank is not in the serious situation many are projecting. "The NBL is not in big problem. We still have one million customers, 6,000 employees and five to six thousand shareholders. Because of certain top officials and vested interest groups, the bank has landed in the current situation. If action is taken against them individually, the bank will break even within a short span of time," he said. (See box). The NBL also suffers from accumulated bad debts. It has bad-debts running in billions of rupees resulting from defaults by some big business houses. According to reports obtained by SPOTLIGHT, some of the major defaulters of the NBL include Biswas Garments, Bluebird, Eastern Sugar Mills, the Golchha Organization, Hyatt Regency, Jyoti Spinning Mill, Mt. Everest Brewery, Oriental Hotels, Phulbari Resort, Silver Fibre Textile and the Shangrila Group. Why Management Contract? This is the million-dollar question. Everybody says the banks are ready for reforms but few agree on the mode. As all previous efforts have bitten the dust, the management contract has come as the latest alternative. As far as the NBL is concerned, the government even diluted its majority share to give 59 percent of the bank's share to the private/public sector. But because of continued political intervention, unchecked irregularities and weak management, the bank is still reeling under pressure. Take, for instance, the case of Sher Bahadur Thapa, a former top official of the bank, who had to resign following allegations of having given loans amounting to billions of rupees to different parties, including the Biswas Garment, in an irregular way. When the bank's board tried to take action against him, even the majority of the board members, including representatives from the government and the NRB, opposed the move under the influence from top ruling party politicians. As all the lighter means of reforming the banks have apparently fallen flat, there is a strong opinion in favor of giving their management on lease. "The boards of these banks had had enough opportunity to clear up the mess. Besides, there is an international tradition of giving bank management on lease on technical service agreement (TSA) at times of negative indicators," said Dr. Pyakurel. Handing over the management of the bank on contract for a specific period to foreign experts, many say, will improve their functioning. "This can inject the custom of corporate governance in them," said Pyakurel. Dr. Puspa Raj Rajkarnicar, a former deputy governor of the NRB, also believes that management contract could be useful to an extent. "If there is a guarantee of sovereignty to the bank's board of directors, bringing in foreign management for technical consultation is OK," he said. "I put special stress on sovereignty of the board of directors because it is they who are ultimately accountable to the shareholders." Opponents: Swadeshi-Vs.-Videshi Some still believe that Nepalese management experts are capable of resolving the present crisis. They point that no real efforts at reforms have been undertaken in the past. "If you end political intervention in the bank's internal affairs, ensure autonomy, appoint responsible and accountable management, check irregularities and take action against corrupt officials, there is still big room for rescuing the bank from present mess," said Premal Khanal, general secretary of the Nepal Bank Employees' Association. "The big business houses are responsible for the 80 percent of the bank's dues of 10 billion rupees. Why doesn't the government take action against them?" If foreign management is the answer, other say, then the government might as well hand over the management of every loss-making institution to foreigners. "The employees at the NBL have had more than six decades of experience in banking. They are the ones running the show at most of the joint venture banks. So you cannot say that the bank lacks experience at this point," said a senior NBL official. Others are more vehement. Dr. Dilli Raj Khanal, UML MP and an economist, is tooth and nail against the present bid to hand over the banks' management to foreigners. "This is a classic case of taking antacid to cure your headache," he said. Khanal's party's chief (Madhav Kumar Nepal) even goes so far as to accuse that the move to hand over the banks' management is aimed at protecting the loan defaulters. Dr. Khanal asserts that the problems encountered by the banks should be looked into a case-by-case basis. He says problems like bad debt, high ratio of non-performing assets, recapitalization, weak management and political intervention should be tackled on their own merits. "Taking a loan of one and a half billion rupees for handing over the management is outrageous." But he, too, believes that technical guidance may be sought from foreign parties. "In my encounters with World Bank and IMF officials, I found them positive on simply giving these banks technical guidance. Handing over the whole management is nothing but ludicrous." The employees' unions of both banks say the prescription will not work. "The problem will not be solved by the management contract," said Mani Ratna Shrestha, secretary at the RBB employees' union. Saying 40 percent of the RBB's bad debts was borne by about 100 big parties, he said the government should have applied the right remedy. Modalities And Accountability There still is much confusion regarding the authority and legal status of the foreign management that takes over the bank. Although the central bank and the Finance Ministry have assured that the technical-service agreement with those parties would be in the overall interest of the employees and the bank, doubts still persist. The precise modalities under which the foreign parties will take over the banks' management are still unclear. Who will the management be accountable to, what will be their responsibilities and will they be penalized if they do not fulfill them? "It would be better if such management could be tied up with the profit of the bank. That could be a good motivation," said Dr. Rajkarnicar. Meanwhile, there was a fresh controversy regarding the NRB's latest move that could increase the cost of handing over the management by as much as Rs 500 million. In its March 27 issue, the leading daily Kantipur published a newsreport saying that the central bank, under pressure from the World Bank, was amending its request for proposal to the leasing parties in this regard. Moreover, there are also uncertainties over whether such management would cut down jobs and restructure branches. The NRB governor has given assurances that the government will not allow jobs to be cut. However, many wonder how the management is supposed to clear up the mess if it cannot prune "over-staffed" banks. Bringing a toothless tiger will once again fail to keep the jackals at bay, they say. "Raising politically-motivated slogans to appease employees will not work anymore. Hard decisions are required," said Dr. Pyakurel. Each of the two banks employs around 6,000 people and has hundreds of branches. Even the board has joined the employees union in opposing the cutting down of jobs. ́Schemes like golden handshake and voluntary retirement should be introduced. So far as the sacking of employees is concerned, we are opposed to that. The NRB, too, has said that would not happen," said Khetan. "If they are allowed to cut down the jobs and roll back the branches, what will be the meaning of this whole reform. You cannot say you have improved a bank by bringing down its size. Anybody can do that, you don't need to spend billions of rupees and invite foreigners to do that," said Premal Khanal. "If the country wants to go ahead in industrialization, we need more involvement of the bank, more branches and more employees. The NBL has not opened a single new branch in rural area in the last ten years." The NBL has 160 branches, which have been serving three million people in the country. "The NBL is still in sound condition. We have 30 billion rupees in total deposit and 27 billion rupees in total lending. We don't need to hand over our management to foreigners," said Khanal. No Escape If everything goes as planned, the government could hand over the management of the two banks to foreign experts before the end of this year. "We will not reverse our decision (to lease the management)," NRB Governor Dhakal told SPOTLIGHT. Even as the debate is taking on Swadeshi-Vs.-Videshi dimension, everybody is clear about one thing. Two of the country's oldest banks are in a critical condition. They have been subjected to exploitation by politicians and vested interest groups for too long. There is no escape from reforming them. The only question is whether the proposed management contract will deliver the goods. Experts say it is an international practice to lease bank's management to outsiders for specific period subject to certain conditions, and the same could be justifiable here, too. As far as the questions of modalities and accountability are concerned, once you have agreed on the basic agenda, the rest, as they say, is mere details. But again, officials at the Finance Ministry, central bank and even donors could do well to clarify these things beforehand to prevent unwarranted controversies to cloud the whole reform process. Any delay on their part to clear the air will lend credence to the views of opponents. The well-being of the two banks is in the best interest of the country. Curing these ailing institutions will have a healthy effect on the whole national economy. ‘The Main Problem Is Some Big Houses Are Not Paying Their Dues’ — RAJENDRA KHETAN RAJENDRA KHETAN, a prominent industrialist, is a board member of the Nepal Bank Limited (NBL), in which the Khetan Group has about 10 percent of shares. He spoke to SANJAYA DHAKAL about the problems faced by the country's oldest bank and issues surrounding the proposal to contract foreigners to manage the organization. Excerpts: There have been many attempts to reform banks in the past. Now comes this management contract proposal. Do you think this will set things right?
In fact, from the institutional and professional perspective, this is the first attempt to actually reform the bank. There are no differences of opinion about the need to reform our banks - all the four: NBL, Rastriya Banijya Bank (RBB), Agriculture Development Bank and Nepal Industrial Development Corporation. The only controversy in the proposed management contract is the decision to introduce foreign expertise. Many have questioned this, maintaining that the expertise is available within the country. There could be many reasons for this. Maybe because funding for the whole process (of awarding the management on lease) is coming from outside, they are bringing the expertise from abroad. This is the only contention. Otherwise, there are no differences. Everybody agrees there is a need to reform the banks. What were the obstacles to previous attempts at reforming the banks? I still think that there was no real reform attempt in the past. Some committees did give reports, but there was neither an institutional observation nor an institutional implementation of their recommendations. To a great extent, the board of directors of the two banks, its management and the officials at the Nepal Rastra Bank, and concerned agencies are responsible for this situation. It is sad to note that when, in the past, international agencies had pointed to the problems of the banks and the need to reform them, NRB officials did not take immediate measures. The government even sold its majority shares in the NBL to induct private sector-led management. Why couldn't this lead to better management? There is a question now that in the name of privatization the government has betrayed us. While privatizing the bank, the government should have sold majority share and the management to one group. However, it only diluted its controlling share to 41 percent and gave the majority share to the public without clearly specifying under whom the management would be. The situation is such that the majority of the board was able to choose the management. Because the board was not united, the mandate of the management never became clear, leading to poor performance. Therefore, instead of pointing fingers, it would be wiser to correct the problems. There is some confusion regarding the accountability of the party that leases the bank's management. Besides, what would be the modus operandi of such management? The current process of reform has taken speed because international donor agencies have called for its need and have even agreed to fund it. Because the majority of the NBL's share is with the public now, there was indeed confusion regarding the authority of such management. This led to differences in the decisions of the NRB and the NBL board of directors. But as everybody was clear about the need for reforms, in principle, we decided to move on and not haggle about the modalities for long. So, I do think this reform will take place. However, there still are some unanswered questions regarding the modalities. What is the main problem of the NBL? Why did it slide so much? There are many problems at the NBL. This is a traditional bank, which lacks many modern facilities. But the main problem today comes from the fact a handful of "big houses" have not paid their loans. Even if the 20 big houses pay back their dues in time, the NBL will, at least, break even. This is clear. I even raised this point at parliament's Public Accounts Committee (PAC), which is asking for details. However, as there is a provision that bars us from providing details of our financial position without the consent of the NRB, I could not do so. I have written to the NRB seeking its approval, but the central bank has not responded. This has led to a suspicion whether the NRB is giving protection to these big houses. This matter must be resolved quickly. How are the legal provisions for loan recovery? The legal provisions are weak. We are sitting on laws that were enacted three or four decades back. Better acts governing the financial sector, including the NRB, debt management, commercial banks, agricultural banks and so on, are required. Moreover, there is still no transparency. The central bank does not involve the private sector in the process of reform. We businessmen from the private sector had proposed to the NRB governor to take the private sector into confidence and consider our viewpoints. However, we have not had any positive indications so far. To what extent is political intervention damaging the NBL? There is political intervention. Otherwise, there would not have been such big credit flows to these houses. If you talk about the NBL and the RBB, a few officials at the top are fully responsible for these bad debts. These officials enjoy political support. The political parties are also supporting these bad debtors. So there is this triangular relationship between the top bank officials, politicians and business houses, which is damaging these two banks. This triangle must be broken. Action must be taken against these businessmen and officials. The board of directors and the employees of these two banks will support the NRB and the government in this direction. There are concerns that once the foreign management takes over, it will start pruning the over-staffed institution. On the other hand, NRB officials have indicated that this would not happen. In this situation, how is the management supposed to clear up the mess? The labor laws of Nepal do not allow such sacking. As the employees union is also against the move, it could even affect the reform process. Schemes like 'golden handshake' and voluntary retirement should be introduced. So far as the sacking of employees is concerned, we are opposed to that. The NRB, too, has clearly said that would not happen. Previous schemes to downsize the NBL seemed to have backfired, because it got rid of the best employees. What can be done this time? That is because we should be clear on our reform agenda. Specific programs could be introduced to replace unwanted employees through scientific schemes. How is the true picture of the NBL at present? The bank is not in big problem as such. We still have one million customers, 6,000 employees and five thousand to six thousand shareholders. Because of certain top officials and vested interest groups, the bank has landed in the current situation. If action is taken against them individually, the bank will break even. There are allegations that the latest reform effort is aimed at pushing the real problems under the rug again. What do you say? This is not true. In fact, the present attempt seems genuinely in the interest of Nepalese people. The only point of contention is whether the management should be given to Nepalis or foreigners. Though we are still clear that Nepalese management, too, could have delivered the goods, now we don't have the time. We must immediately go for some reforms. The vested interest business houses have indeed sought support from officials at the NRB and Finance Ministry regarding loan recovery. In the last one and a half years, there have been four changes in the chairman of the NBL board. This has created instability. Although the majority share is in public hands, we have to welcome the chairman nominated by the government. We really think that if the government nominates capable and honest people, the bank can move ahead. ‘There Are Positive Sides Of Management Contract’ — PUNYA PRASAD DAHAL Punya Prasad Dahal is the executive chairman of the Rastriya Banijya Bank (RBB). A former industry secretary and veteran bureaucrat, Dahal spoke to SANJAYA DHAKAL about the situation of the RBB and the issue of leasing the bank’s management in contract. Excerpts: What is the overall financial situation of the Rastriya Banijya Bank?
Auditing work of the last fiscal year 2055/56 is going on. During the previous fiscal year, the situation of the bank was not good. The bank was in loss. We do not have operating loss. The problem we have is in loan recovery. But we are making provisions to compensate for the losses. Apart from that, there is no reason to lose hope. As ours is a big bank, it will not be difficult for us to sail over the present losses. How much of bad debts do you have? In principal our bad debt is above Rs 910 million, but its cumulative interest amounts to Rs 3 billion. What are your views regarding the issue of leasing out the RBB on management contract? Will it solve the existing problems? Nobody should believe that the management contract would bring a magical solution. We definitely are in short supply of the skill and technical expertise needed to operate a bank in today’s competitive age. Earlier, there was no competition and the consumers had no choice but to come to us. Because of poor service-delivery and weak information system, today we need knowledge, expertise and experience. That is where the TSA (Technical Service Agreement) or management contract comes in. What I have understood is that about eight people with such expertise will come from outside and help us in our affairs. I don't know the overall procedures under which they will function. My guess is they will work in coordination with us. I take that positively, as it could help us perform better. Hopefully, these people would be knowledgeable about the ways to improve our condition. They could also help us in better manage our human resources and train them as well. If we could use their expertise for our benefit, this could prove good. I do not deny that there could be some negative aspects of this. But looking from this perspective, we can take advantage of their expertise. What is the current status of the management-contract process? The whole thing is being done by the Nepal Rastra Bank (NRB). We have sent three members from our board, who are studying the matter together with the NRB officials. What internal reforms is the RBB introducing following the report by KPMG, which termed the bank as technically insolvent? We are trying to develop our human resources. We have formulated guidelines on extending loans. At a recent meeting in Pokhara, bank executives asked managers of local branches to voice their problems and present recommendations to improve the RBB's service. The local managers reported an improvement in loan recovery. After the KPMG report, there was speculation that our deposit collection would decline. But nothing like that has happened. On the contrary, our deposits have doubled. We have categorized customers into prime, good and satisfactory in order to extend loans. Earlier, we used to invest as much as 93 percent of our deposits. But with the current high deposit collection, we are finding problems in locating more areas for investment. Around Rs 10 billion of our collection is currently locked in dollar and treasury bill investment. The RBB has closed down some of its branches in rural areas. Why did you do that? Won't it affect the people? No. We have closed only eight branches because of security reasons. At some places, we have merged the branches. But this is not intentional. We are aware that the RBB has certain obligations to the people. In fact, government banks like the RBB are the ones that sowed the seeds of banking among the people. Besides, we don't have problems of loan recovery in rural areas. In general, the people are aware of their obligations to return loan. The private commercial banks are centered in cities and have a handful of branches. We have 200-plus branches. Our service is, therefore, required more in rural areas. Because of our easy access, the common man prefers us to other banks. What are the immediate challenges before the RBB? One is loan recovery. The existing laws are more tilted towards the customers. Earlier, when I was in Ministry of Industry (as its secretary), we used to stress the need for laws in favor of the people. The company act, so drafted, is heavily tilted towards people. Now I understand that these laws are hampering the banks. If you take a loan, you must pay it back. You cannot escape that responsibility. Besides, we see that some customers go to the court and seek stay orders when they have to pay back the loan. Although, that is not our problem, it becomes cumbersome for us to fight cases in court to get back our loans. Another problem is human resource management. We regularly face problems in transferring our employees. That apart, there is no carrot-and-stick approach to deal with employees. We hope the new management will solve these problems. |
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