FIs defaulting IPO to face NRB's wrath

REPUBLICA

KATHMANDU, Nov 9: Nepal Rastra Bank (NRB) has warned the nine financial institutions, which did not comply with its directives on initial public offering (IPO), of terminating their operating licenses if they did not go for public issue by the end of this fiscal year.

The financial institutions receiving such warning are seven development banks, including Rising Development Bank, Muktinath, Shangrila, Bhargav, Rara, Corporate and Professional Development Bank, and two finance companies, including Namaste and Manjushree Finance.

Going by the central bank´s directives, banks and financial institutions should issue IPO within a year of their establishment. "However, these nine institutions have not shown any indication of public issue even after the completion of two years," said an NRB official.

Along with warning, the central bank has also pledged them additional time; they have been asked to complete public issue by mid-July 2011. "If they still turned deaf ears, we will terminate their operating licenses," said the official. Going by the law, the central bank can terminate the operating licenses of the financial institutions not adhering to its directives.

Interestingly, sources informed Republica that the companies flouting the IPO provision are not weak financially. "Instead, records suggest they are managed well, have maintained prudent CD ratio, enjoying handsome profits and have tens of million rupees in reserve. We are surprised over their apathy toward public issue," said the source.

Some of the officials even raised question over the intention behind the promoters not welcoming public shareholders, particularly as, if the NRB terminates licenses, those having good loans can easily service depositors´ liability and walk away with reserve capital.

"Given the longer term returns and clients base they have developed, such a motive appears irrational. But we cannot rule that out," said an official, adding that central bank was closely monitoring the move of the financial institutions not complying with its directives.

The central bank has lately tightened its knot against financial institutions that have not complied with its directives. Officials said they had to take stringent steps as the number of finance companies and district level development banks flouting its rules are growing over the years.

In this connection, NRB has also sought justifications from half a dozen financial institutions over why it should not terminate their operating licenses as they consistently failed to comply with its capital related directives. The step was taken after their promoters continued to turn deaf ears to recapitalize despite repeated warnings and imposition of restrictions to mobilize deposits and issue loans.

"We have launched a drive to strictly enforce our directives, as we fear the number of financial institutions not complying with IPO provision could mount substantially if existing problem is not addressed," said the official. An NRB report cites a significant number of finance companies and development banks have not even initiated process for IPO even though they are well into the second year of operations.