NRB initiates moves to pull out from NBL

REPUBLICA

KATHMANDU, Nov 24: Nepal Rastra Bank (NRB) has started discussions on different options to recapitalize and pull out from the management of the Nepal bank Limited (NBL), where financial sector reform has remained sluggish.

The central bank is discussing mainly three different options: recapitalization through rights issue, induction of strategic partner, and merger with other local bank to turn around the negative net worth and hand over its management to private party.

The bank has negative net worth of Rs 4.5 billion. According to Maheshwar Lal Shrestha, chief executive of the bank, it will need Rs 7.10 billion to reverse the situation and also fulfill capital adequacy obligation of 10 percent.

Under the first option, NRB is discussing the prospect of raising the capital required to turn around its financial health through rights issue by asking the shareholders to pump in more capital.

“In this connection, we are mainly awaiting concrete decision from the government on whether it wishes to pump in additional capital in the bank. This is crucial for us to decide on how to move the process ahead,” a senior NRB official told Republica.

Although the majority stake in the NBL is owned by the private sector, the government is still the largest shareholder in the bank. And unless the government clarifies its stance on further investment, the central bank says it will not be able to go to the other options.

Under the second option, the central bank has mooted induction of strategic partner offering substantial stake in the bank. “We can raise capital through rights issue to employees and other shareholders as well,” said the source.

Under the third option, which has been pushed with slim hope so far, the central bank is also working out the possibility of recapitalizing the bank through merger.

“This appears to be a tricky option, but given the criticism the central bank is facing over its failure to hand over NBL management to the private party, we are openly discussing all different possibilities,” said the source.

NBL is one of the two banks in which financial sector reforms were introduced under the aegis of the World Bank in 2002. While the reforms have cost the country loans worth Rs 8 billion, some Rs 2.5 billion has already been spent in steering reforms in the NBL.

However, even after about eight years of reforms initiated under its direct supervision, the central bank has still failed to pull out from the bank. While donors blame the situation to weak commitment of the government and the central bank to reforms, the central bank blames unwanted resistance from the politically-backed trade unions.

If labor reforms had moved ahead as smoothly as financial sector reforms, the situation in the bank would have been different, argue NRB officials.

Records show, NBL has paid up capital of just Rs 380 million and operates with 110 branches across the country. Its employees eat up in salaries and perks more than 80 percent of the bank´s income, whereas the industry average for similar overhead stands at just about 10 percent. The bank´s deposits stand at around Rs 42 billion and loans and investment at about Rs 31 billion.