Acting on a decision of the Appellate Court Patan, Nepal Rastra Bank (NRB) has told Himalayan Bank and the Bank of Kathmandu to deposit a sum equivalent to the counter guarantee they have provided to the Chinese contractor which was fired for non-performance by the Melamchi Water Supply Project.

The two banks have also been told to keep one third of the amount in reserves as contingent strategy so that even if they have to maintain the provisioning of counter guarantee amount, their net worth would not be affected.

The China Railway 15 Bureau Group had been originally contracted to build a tunnel for the Melamchi project. The scheme aims to bring drinking water from the Melamchi River to parched Kathmandu through a 26.5 km tunnel.

As per the central bank order, Himalayan Bank and the Bank of Kathmandu are required to deposit Rs 660 million and Rs 850 million respectively at the central bank in a non-deductible condition. They have been ordered to maintain this amount besides the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

These two banks had provided a counter guarantee to China Construction Bank in the form of a performance security of US$ 6.62 million and guarantee for advance payment of US$ 6.62 million and 1.4 million euros. The Chinese bank had stood guarantee for the China Railway 15 Bureau Group with which the Melamchi project has terminated its contract.

After the Chinese company filed a case against the Melamchi project in a Chinese court to withhold the guarantee amount following the termination of its contract in September 2012, the two Nepali banks got sucked into the dispute as counter guarantors.

“Besides depositing an amount equivalent to the counter guarantee into a special account at NRB, we have to keep a reserve of Rs 220 million which we could have distributed to our shareholders this year,” said Ashoke Rana, CEO of Himalayan Bank.

 He added that they had also been told to maintain 50 percent of that amount in reserve in the next fiscal year if the issue is not sorted out by this fiscal year.

Meanwhile, CEO of the Bank of Kathmandu Ajaya Shrestha said that the central bank’s directive to keep the amount aside would not hamper the bank much, but they would be unable to use it to issue loans and be deprived of the benefit of earning interest on it.

NRB Spokesperson Bhaskarmani Gnawali said that both the banks were asked to keep a certain amount at NRB as per the court order. The banks are happy that the court didn’t direct them to hand over the amount immediately. “It is good that we were not asked to pay the amount. It gave a very good verdict regarding the circumstances of the case,” said Rana.

After the Melamchi project demanded money from the domestic counter guarantors, they had gone to court arguing that they had signed a counter guarantee agreement with the Chinese bank as per international practice.

They have said that as the Chinese bank failed to release the funds citing a Chinese court ruling, the Nepali banks should not be asked to make payment until it is first released by the Chinese bank.

The two banks are also fighting a court case against the former contractor of the Melamchi project in China. They have expressed concern that the Melamchi project, the main defendant in the case, is not being active in defending itself against the charge filed by the Chinese company.