| Username |
Post |
| Brook |
Posted
on 27-Oct-03 08:08 PM
Whose loan is it anyway?
Banks blacklist defaulting borrowers.
-Arthabeed
A blacklist of people who have defaulted on loan payments was made public through the media recently. The newspapers took a keen interest, although some quarters turned a blind eye. Rastriya Banijya Bank has listed several businesses owned by prominent Nepali business people for what they term punitive action in future. The Beed feels this smacks of half-baked work that not only fails to understand business issues, but also leave many questions unanswered.
Businesses formed as joint stock companies under the Companies Act worldwide have the fundamental principle of limited liability, so if the business goes bust, the liability of the shareholders are limited to the stock they bought into. You cannot drag the shareholder, his past and the future into the deal. To pull a veil over the inefficient review processes, banks are attempting sweeping measures to clean up business activities. Remember when the stock exchange in Nepal was picking up in the mid-90s and the government could not deal efficiently with insider trading? It slapped up an investor-unfriendly Company Act that practically killed the national stock market.
Now this new list could be an unfortunate repetition of the past. Like the poplars on the Arniko highway, we uproot the whole tree when pruning a few branches will do. Banks must be able to make a distinction between businesses that failed despite genuine efforts and those that were made to fail by promoters, who in turn cash in through the banks. It is a global banking principle that the former merits consideration and the latter, punitive legal action. Banks also must understand that they are partners in the ventures and are responsible for its failure. If the promoters request foreclosure, the banks cannot consider them defaulters.
It isnt the Beeds intention to target banks. In Nepal, good policy intentions of punishing intentional defaulters end up in action that often puts the brakes on economic activities. It is also important to note, as some business people pointed out, that bigger defaulters manage to square up their cases and escape getting outed. The other question is, what effect, if any, does a defaulters name made public have? It happens far too many times, and frankly, no one really cares. There are lists of corrupt politicians, businesses that squeeze money out of capital markets and promoters of banks that milk their own institutions. Its enough to make most Nepalis throw their hands up and ask, Why bother?
This time the Central Bank faces the challenge of proving it will take action on real defaulters. It will also be interesting to see what the other banks will do, as they have defaults on the same account or the same promoter group(s). Needless to say, proper policing of banks and their portfolios by the Central Bank as well as other regulatory authorities are indispensable, but their processes must be acceptable, have public support and result in action. Otherwise it just becomes fodder for the cocktail circuit.
Nepalitimes.
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| Arnico |
Posted
on 28-Oct-03 04:26 AM
Interesting article. Brook, thanks for bringing our attention to it.
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| Brook |
Posted
on 28-Oct-03 08:22 AM
It was with the hope that it might spark some kind of an exchange that I posted that article here. Clearly, the response is lukewarm. How's this for something scandalous? =)
My opinion:
Personally, I think it is so easy to take potshots at the cocktail circuit that its become almost fashionable to do so. It is no surprise that the Beed hasnt been able to refrain from it. However noble the intention of a proposed policy intervention, just the fact that it is donor-initiated or involves foreign hands provides fodder for a few individuals with vested interests to appeal to the clueless and mostly indifferent masses for support. Given the fact that an encroachment into the domain of our fragile nationalistic ego is the only external stimulus capable of uniting the otherwise dissonant intellectual and political voices of this country, I find the Beeds deft, albeit subtle, use of this dirty trick extremely despicable.
Not all of us know the Company Act. Some of us may not know the fundamental principle of limited liability. But what we all certainly do know, as borrowers, depositors and investors is that the institution we deal with is accountable to us however small our portfolios may be and we are accountable to the institution however large our portfolios may be. The burden of responsibility becomes all the more serious when the intermediary we are dealing with is a government owned enterprise. So when a handful of businesses with incestuous inter-linkages between their subsidiaries, sister enterprises and financiers (which in the case of Nepal are limited to commercial banks) use a whole host of dubious designs to secure astronomical amounts of loans and bet on their political patrons to eventually bail them out by forcing these state owned banks to write off the loans, something is seriously wrong. This is a practice which has implications not only to the business scene of this country but also speaks volumes on the legal framework of doing business.
In that spirit, I laud the recent NRB move to use legal channels to recover as much of delinquent loans as it possibly can from these fraudsters. Limited liability, I am sorry to hope, may not remain sacrosanct. A case in point is the notorious Fulbari Hotel and Resorts. Although I am of the view that it was an extremely bad investment to begin with, I am willing to cede that it has had to endure a series of severe external shocks. But that doesnt change the sore reality for Nepal Bank Limited, its principal financier: the market value of the Hotel is nowhere close to the loan amount. I doubt if the book value will be close to the loan amount.
I see the blacklisting of defaulters in a similarly positive light. It may not bring overnight changes and as the Beed rightly anticipates, noone may even care. This humble scribe, however, feels that it is a step in the positive direction, a step towards greater accountability on part of the businessmen and a step towards an era of an entirely new credit culture. Let the blighted poplars on Arniko Highway go if they have to. Nepali financial markets could very well do without these cancers that are only but lowering the water table. Other, younger, more agile ones thatll come to take their places will reap the benefit of lower cost of capital.
I hope the Central Bank follows up on this reform drive with utmost sincerity delicately tweaking things just a little bit where necessary yet not coming short of using a heavy hand where warranted.
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