KATHMANDU: Nepal Rastra Bank (NRB) — the central bank — has moved Patan Appellate Court to press for liquidation of the troubled Nepal Development Bank (NDB).

If the Court decides in favour of NRB, then NDB will hold the unenviable record of becoming the first banking institution in the nation’s financial history to be liquidated.

Liquidation refers to the process by which a company — or part of a company — is disbanded, liabilities settled and subsequently the assets and property of the company is redistributed among shareholders.

A liquidator — in other words an officer who is specially

appointed to wind up the company’s affairs — oversees the due process. The liquidator is legally empowered to act on behalf of the company in various capacities. S/he is primarily responsible to bring and defend lawsuits.

Other duties and responsibilities include collecting outstanding receivables, paying off debts, finishing corporate termination procedures and settling all claims ahead of the dissolution.

Stating that the bank could not be revived and deserves the liquidation as per Section 77 of the Bank and Financial Institution Act, 2007, the central bank sought Patan Appellate Court’s approval to appoint liquidator to begin the liquidation.

However, the court has the prerogative to take a decision that could seek an alternative if any party evinces interest to run the beleaguered institution.

NDB — Nepal’s first development bank that started its operations in 1998 — is ailing for many years. According to NRB’s findings, NDB has run up huge losses. Though it has a paid-up capital of Rs 320 million, the losses are pegged at Rs 670.87 million. While, it has total assets worth Rs 730.13 million. But, its non-performing assets stand at 55.09 per cent and capital adequacy ratio (CAR) is a whopping 48.31 per cent, which is almost five times more than the permissible limit.

In this light, the ill-fated financial institution has little chance of a revival, especially after Dreams Capital Ltd’s failed attempt to pump Rs 280 million to put it back in business. One of the negotiators, who were involved in the revival bid, said that the capital injection could restore CAR to the required level of 11 per cent.

But he has reservations about Uttam Pun — NDB’s patron — who has shares worth Rs 1.6 billion. Pun claimed to have resigned from his post and showed willingness to sell his shares after the Dreams Capital Ltd declined to invest because of his presence. Pun’s actions smack of escapism to evade legal action as he cannot sell his shares that have been frozen for transaction.

Association of Nepali Development Banks and the Association of Nepali Finance Companies had also lobbied hard with NRB not to liquidate NDB. However, the central bank had no option but to opt for liquidation.

Earlier, Sunanda Shrestha and his group had injected Rs 86.2 million. Shrestha also bowed out, thanks to Pun and his associates, who did not want to let go the management.

NRB had declared NDB an

ailing institution on October 11, 2007. Over the years, NDB never followed the central bank’s regulatory obligations, instead frittered away

depositors’ money. Had the NRB taken bold step at the outset, then less depositors would have been in trouble today.

Uttam Pun — the then executive chairman and promoter of NDB — repeatedly moved the Appellate Court, got a reprieve from the judiciary even as the unsuspecting public continued to deposit in his institution.

NDB got many opportunities from NRB but each time it tried to get away by furnishing abstract clarifications. On June 2, NRB had sought a clarification within 15 days, citing Clause 86 of Nepal Rastra Bank Act. NDB, in turn, submitted a capital plan on June 18, seeking time till

October 17 to improve its financial health. It claimed that given the opportunity, it could sell Rs 10 million worth shares and

recover Rs 90 million deposit from Nepal Cooperatives as

instructed by NRB.

Under the circumstances, liquidation is the only corrective measure that a regulator can

restore to prevent further losses, putting paid to the bank’s hopes to operate with doctored balance sheets and misusing public

money.

Legal action also has to be taken against NDB’s management and promoters to send out a strong message that depositors’ sums are safe and central bank is capable of living up to its regulator’s role. However, the central bank has to ensure speedy handover of around 3,200 small depositors’ money.

Time is ripe for NRB to act tough to rein in tainted banks in an otherwise healthy banking

industry. It’s high time as well to ponder over setting up a national deposit insurer, which can insure deposits up to a certain limit.

Banking is one of the few sectors that has not only created jobs but also given a chance to the investors to operate in a transparent manner. However, the bad apples need to be weeded out to restore depositors’ faith that banks and financial

institutions are the custodians of public money.