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VOL. 03, NO. 02, June 16, 2009 (Ashadh 02 2066)
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Banking On Lessons
For the first time in Nepal’s banking history, the central banks takes steps to liquidate a development bank – smashing ‘myths’ of ‘banks’ invincibility
By SANJAYA DHAKAL
Among the scores of woe-struck depositors of the beleaguered Nepal Development Bank (NDB) who thronged at the governor’s chamber was a lady who had put all the money her husband earned as migrant worker and who had obtained compensation for industrial accident.
Like her a number of depositors wailed in front of exasperated officials of Nepal Rastra Bank (NRB) on June 4.
Depositors of NDB were compelled to knock the doors of NRB after the savings and investments of the depositors and investors were jeopardized after the central bank issued a 15-day notice asking NDB directors why the bank should not be liquidated.
The depositors were desperate to learn whether their hard-earned money will be returned or not.
The NRB officials are still uncertain if all the depositors will be able to get back their money.
The loss is too much, they say.
“We had asked the NDB one and a half years ago to improve their financial health. Instead it deteriorated and recently their accumulated loss crossed Rs 680 million forcing us to take this action,” said governor Deependra Bahadur Chhetri.
He said that once the court gives them the go-ahead, the NRB will proceed with liquidation process and depositors will be treated fairly as per the law. The NDB had total of Rs 750 million deposits and Rs 400 million worth equity shares.
As a part of its action the NRB has frozen the properties and transactions of the bank. With this decision, the hapless depositors and investors will have no option other than to wait. At best, they could realize only a portion of their savings. Various reports have said that the NDB held Rs 720 million in total deposits. The big chunk of the deposits are held by the institutional depositors such as Employees Provident Fund (EPF) and Nepal Army Welfare fund.
As per the existing laws, the NRB will have to file a petition seeking dissolution of the NDB at the appellate court first. If the court agrees with its logic, then the NRB can appoint a liquidator who will assess the assets and liabilities. The liabilities will be met on a priority basis by selling off the assets.
This is the first time that the central bank had taken the drastic decision of liquidating a financial institution.
“In the past also we have taken different measures of actions against the ailing and erring banks and financial institutions. In some institutions, we have only given warning, while in others we have intervened in the management. This time we had no option than to go for liquidation given the size of loss,” said the governor.
‘Myth’
The NDB fiasco has pricked the inflated myth surrounding the invincibility of the banks.
“This episode has indeed busted some myths. People used to run after banks that give higher interest without learning about their fundamentals. Investors who blindly put their money on shares of any bank that issue IPO should also learn lesson from this episode,” said Anil Shah, CEO of Nabil Bank and vice president of Nepal Bankers’ Association (NBA).
In last few years, the commercial banks and financial institutions had mushroomed in the country. The number of A class commercial banks alone has crossed two dozen.
Scores of development banks, finance companies and hundreds of cooperatives have swarmed the financial market – making it difficult for customers to choose right ones from wrong ones.
The NRB, on its part, says that it is keeping constant watch over the health of banks and financial institutions.
“Most of the banks and financial institutions are performing very well. The depositors, generally, should rest assured,” said governor Chhetri.
But he added that the depositors would do well in first studying about the financial health of any bank or institution where they want to put their money or invest in their shares.
“We regularly bring out financial reports. The banks and institutions also bring out their annual and periodic reports. One should study them before making any decision,” Chhetri advised.
Shah says that the NDB episode should at least contribute to promote the banks who have worked hard and are in excellent financial health owing to their strict adherence to prudential norms. Otherwise, the wrong ones were getting away with lots of mileage, he said.
The NDB mess should ring alarm bells. It was after a couple of banks failed in the United States last year that triggered the global recession. Economists point at the need for the central bank to keep watchful eye on the banks and financial institutions to avoid similar catastrophe. After all, there is a saying that those who do not learn from histories are bound to repeat them.
