Of economic renegades and Nepal

Kathmandu, March 7:

Unlike plain old economic defaulters who shook the dust of their heels while declaring inability and often obstinate unwillingness to repay loans and debts, economic renegades try to change the rules of the game, fix books and corrupt the system to continue functioning as they always have. And that is by taking loans in the name of legitimised corporations, siphon the money off for personal use and bail out before the ship sinks, mostly riding out on the ‘limited liability’ clause.

Banks and financial institutions are left to hold on to the can full of bad loans and soaring non-performing assets, while the poor old investors and bank depositors watch in silent rage the cavalcade of Mistsubishi Pajeros at wedding ceremonies thrown by these bankrupt ‘renegades’, fit for a princess’ marriage.

This is what gets the goat of a banker like Craig McAllister, CEO of Nepal Bank Ltd (NBL), who not only bristles at the ineffectiveness of some of the banking laws but more, on their inadequacies.

So much so, that he took the unprecedented step of meeting a select group of journalists to tell the side of the bankers’ story, complete with a team comprising of Peter Ward, chief credit officer, NBL and Jogendra Keshari Ghimire, the bank’s lawyer.

Focusing on the issue of ‘limited liability’ of organisations and defaulters that is often used as a means to escape responsibility, McAllister reiterated the right of banks to ask for further financial details from defaulters, including reevaluation of their assets, verification of their loan guarantees and collaterals.

In recent times, some of the most prominent defaulters, have cried foul on the issue of limited liability, accusing the banks of breaching the protection offered by this clause to them.

The bankers however argued that protection is due only when there are genuine reasons for defaulting under this limited liability clause and not when figures are concocted and the final call for curtains is premeditated and orchestrated.

Taking up the other thorny issue of ‘blacklisting’, Peter Wand, chief credit officer, NBL said that although it is an effective albeit rather crude instrument for making defaulters repay, it should be bolstered by other banking laws.

Laws must allow banks to protect themselves from defaulters who have practiced and perfected mechanizations to cheat on banks and smaller customers who put in their money in good faith in the banks.

If effective and a quick measures are not taken in the form of more detailed and realistic laws and matters are allowed to slide, McAllister warned, that there is a real danger that banks might be forced to opt for ‘disintervention’ — a state where banks opt to slow down or stop from their basic function of ‘intervening’ between depositors and borrowers.

Signs of this malaise is already evident in the form of boom in retail baking — housing loan and automobile loan schemes — being offered by almost all banks in Nepal.

On the one hand, continuing Maoist insurgency makes investment in any large infrastructure project unviable. On the other, lax banking laws allow blatant and willful default on huge bank loans by a known group of industrialists, repeatedly.

It is not therefore surprising that banks are opting for smaller, safer and larger number of transactions rather than big and bold ones.

This limits the scope of banking and its growth. More importantly, it hurts the economic progress of the nation by nipping all investment on industry and infrastructure that can help a least developed country like Nepal to move up the economic ladder.