After international auditing agency KPMG termed the bank—along with Rastriya Banijya Bank (RBB)—”technically insolvent” due high level of non-performing loans (NPL), the central bank had taken over the NBL management on March 8, 2002.

Central bank officials said an NRB board meeting on Friday decided to exit NBL, after being assured the country’s oldest bank has recovered.

NRB Spokesperson Mamanohan Kumar Shrestha said both the management committee (board) and the management team (management) of NBL were dissolved from Sunday. He, however, clarified the current management team headed by NRB Director Maheshwor Lal Shrestha would  continue until a new board is set up and a new chief executive is appointed.

A Special General Meeting (SGM) of NBL on Sunday elected Nischal Pradhan and Surendra Bahadur Singh as public directors. The government, which has 62 percent stake in the bank, will have to send four board directors and a professional director.

Although the bank’s financial status is largely stable, it is yet to meet the capital requirement as per the NRB directive. As of first quarter of the fiscal year, the bank’s capital adequacy ratio is 5.28 percent.

But NRB Spokesperson Shrestha said after the bank issues debentures and sells its fixed assets as per the plan, the capital adequacy ratio requirement of 10 percent will be met.  As of first quarter, the bank’s NPL stands at just 4.78 percent.

“The bank took 13 long years to recover. But if the scale of crisis in the bank when we took over is considered, it is not too long,” said Maheshwor Lal Shrestha, coordinator of the NBL management team. “The bank, in fact, was on the brink of collapse.”

Crisis

When the central bank took over the NBL management, its financial health was precarious. The NPLwas 56.27 percent (Rs 10.83 billion) and net worth was negative by Rs 10 billion. The KPMG report concluded loan assets of NBL and RBB were highly overstated and extremely risky, and as a result, the banks were technically insolvent. A total of Rs 34 billion public deposits were at risk.

As of mid-1998, NBL and RBB had losses of around $450 million — around 46 percent of the annual budget, or 8.6 percent of the gross domestic product (GDP).

The report stated there were no reliable data available on the banks’ loan portfolio, financial accounting was primitive and annual statement were not produced in six years, no business strategies, weak human resources policy and governance and management were highly politically driven. A World Bank study in 2002 also revealed insider lending and improper evaluation of collateral.

Turnaround

To address the deficiencies, the government introduced a comprehensive reform package with help from donors led by the World Bank in 2002. One of the components of the reform programme was restructuring NBL.

In mid-July, the NBL management was handed over to ICC Bank Ireland which brought voluntary retirement schemes (VRS) for incompetent employees and improved the IT system, besides debt recovery.

The Debt Recovery Tribunal was also established, particularly to recover defaulted loans from banks and financial institutions. The measures were taken to recover defaulted loans, while several loans were written off too. The government injected Rs 1.39 billion in NBL two years ago. It issued 1:9.5 rights shares. The bank also converted the World Bank’s SDR loan of Rs 2.5 billon into its capital.

NBL is now selling its fixed assets and it plans to raise Rs 2 billion from the sales. According to management coordinator Shrestha, it has already sold fixed assets worth Rs 630 million. “There are few old loans, but they have adequate mortgage,” said Shrestha.

The bank has also reduced the number of staff to 1,981 from 5,652. Shrestha said the bank has now won the people’s trust and it can now move ahead comfortably.