These two banks had gone to court after Nepal Rastra Bank (NRB) sought to debit the equivalent amount of counter guarantee from their account at NRB and to pay Melamchi.

The banks had demanded injunction on payment claiming that they should not be forced to make payment to Melamchi as they failed to receive guarantee amount from China Construction Bank that had given guarantee to the former contractor of the Melamchi Project— China Railway 15 Bureau Group, with which Melamchi terminated contract in September 2012.

After the Chinese contractor filed a fraud case against Melamchi in a Chinese court demanding not to release the amount to Melamchi from China Construction Bank, it prevented the Chinese bank to release the amount to Nepali banks. And Nepali banks have also been refusing to pay amount to the project.

A joint bench of Bhim Bahadur Bohora and Shiba Raj Adhikari scrapped the two banks’ appeal.

According to Shikhar Pandit, a lawyer defending in favour of Melamchi, said that the court gave such verdict after six days of marathon hearing.

 “As per the Uniform Rules for Demand Guarantee, the Nepali banks should have released the amount to the project immediately,” said Pandit. “Had this verdict gone against Melamchi, many construction projects in Nepal would suffer heavily as giving demand guarantee means to be ready to pay whenever demand is made.”

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.

Bank of Kathmandu Chief Executive Officer Ajaya Shrestha said that he received the information about verdict from the court over phone and added that they would hold discussion with lawyers about the possibility of appealing in Supreme Court.

About a dozen senior lawyers including Shambhu Thapa, Purna Man Shakya, Badri Bahadur Karki and Sushil Pant among others had debated on the behalf of the two banks. Regarding the payment, the Chinese court—Zhengzhou Intermediate People’s Court—in January ruled that Melamchi Drinking Water Project cannot get bank guarantee and advance payment guarantee amounts from the concerned banks, terming the project’s claim as “fraud”, which means the Nepali banks are unlikely to receive the release guarantee amount from China.

These two banks have already provisioned half of the amount they are subjected to pay, possible risk in fiscal year 2013-14. They were supposed to make full provisioning in the current fiscal year, according to Shrestha.