Getting tough

For the past several years, big loan defaults have grabbed the media headlines and absorbed a lot of attention of lawmakers and government leaders. By the defaults under question are meant billions of overdue loans taken by a few dozen people mostly from two banks — one, the Nepal Rastriya Banijya Bank, a fully public sector undertaking; and the other, the Nepal Bank Ltd, a partly-government-owned bank. Years of unsatisfactory management and poor regulation, the banks had reached a state of bankruptcy. The government, to reverse its own failure to manage them well, handed them over to foreign management at World Bank prodding and under its loans and grants to put them back on track, and to make them fit for privatisation. Part of the rationale for bringing in the foreigners was to recover the bad loans. The foreigners stayed here for about four years and then they went back, saying that whatever they could do they had done. They cut the proportion of the banks’ non-performing assets and introduced new technology to enable the two banks to compete better. They recovered some of the loans but they said without the government’s solid backing, they could not bring all the wilful defaulters to book.

With their departure, the Nepal Rastra Bank (NRB) took over, and Nepali managers were put in place. They, too, have continued the reform process thus set in motion. In recent times, competition in the financial market has intensified greatly, with the number of private commercial banks approaching 30 and they are vying with one another for a larger pie of the small market. The donor for the financial reform, the World Bank, has kept its eye peeled for major deviations. Public consciousness has increased. The bad-loan crisis was the result of collusion between unscrupulous borrowers, politicians, bureaucrats and bank officials, as well as of poor supervision and lack of correction by the central bank and the finance ministry. But now the political context is not the same as then. So, the times do not seem favourable for intentional defaulters. However, a good part of the overdue loans are yet to be realised. A few big defaulters account for most of the arrears.

This coalition government has decided to get tough with the wilful defaulters through several punitive actions, including a ban on transactions in their properties, restrictions on operating businesses and seizure of passports. These steps had proved to be a flash in the pan in the past. Wednesday’s Cabinet meeting is reported to have decided to act against 238 defaulters who owe at least Rs. ten million each. Further measures include disqualifying them from any political appointment or removing them if they already hold one, barring them from becoming promoters of a company, and seizing their investments within Kathmandu. The Cabinet has also formed a panel charged with monitoring the whole operation and speeding up legal action against those do not fall into line. But for a public long subjected to such often unexecuted decisions in the past, nothing less than the fact of implementation may be expected to be convincing. However, being new and untested, this government deserves the benefit of the doubt. It must also instil into borrowers or those in authority who collude with defaulters that they cannot get away unpunished.