Nepal Development Bank (NDB) started its operation in 1998 as a development bank with a paid-up capital worth Rs 320 million. Of the total capital, 70% was owned by the promoters while remaining 30% shares were floated to general public. Top institutions like Nepal Rastra Bank (NRB), IDBI of India also had stakes in the company. But a series of negative performance of the bank ultimately lead it to road of bankruptcy. Sadly, on Jun-02-09, NRB filed a case against NDB to initiate the process of liquidation remaining within the clause 74 of the Banks and Financial Institutions Act. It said that the poor performance of NDB coupled with irresponsible management forced it to liquidate the bank. NDB now has 15 days from Jun-02-09 to defend itself from being liquidated.
How did it all start?
Research performed by ResCon shows that NDB’s net profit has been on the negative side from 2005/06 onwards. Likewise, networth/share of the bank has also been on the negative side from 2005/06 onwards. The capital fund and non-performing loan have also been worsening in the last four years for the bank. Hence, taking all the fundamentals into consideration, it clearly shows that NDB’s health was not good at all. Now, this urged NRB to intervene and take actions.
When a bank’s capital fund becomes negative or when the capital fund is not adequate, the bank is considered to be technically bankrupt. In this case, NRB comes into picture and takes following set of actions against that bank.
- Not allowing the bank to float bonus shares
- Not allowing the bank to declare dividends
- Stopping the bank to expand its branches
- Restriction on deposit and credit
- Dissolution of Board and entry into management
In order to come out of technically bankrupt position, NRB allows the bank to submit a capital plan. This plan must clearly mention the ways via which the bank is expected to ameliorate its ill position. If satisfactory, NRB allows the bank to move ahead else it takes over the management or liquidates the bank (depending upon the gravity of situation).
In case of NDB, as per the Governor, Deependra Bahadur Kshetry, NRB had issued a set of directives to the NDB in October of 2007. As part of the directives, NDB was to hire a professional CEO which it eventually did in December 2007. Sunanda Bahadur Shrestha was appointed as a CEO who later solicited help from NRB as he was not given power to make decisions pertaining to the bank. This clearly showed that the bank was not committed in improving its bad health and NRB’s set of directives were not being taken seriously by the management. Such a violation of NRB’s directives compelled it to take over the NDB and finally start the process of liquidation.
Now the question which everyone has in his/her mind is, despite bad bank’s health, why did NRB and SEBON allow NDB to issue right shares? Well, being a central bank, NRB’s key responsibilities are to ensure that investors and depositors monies are safe and that the bank is in a good position to conduct its daily operations. Here, even though NDB’s financial position was depreciating, an injection of capital could have rejuvenated the bank. On that pretext, NRB approved and allowed NDB to issue right shares to the investors. But, as mentioned above, the management team was not serious at all and there was a rumor that a conflict of interest was present amongst the members of the management team. Thus to avoid further damage to the bank, NRB’s intervention was imperative.
What about the monies invested in NDB?
The other question an individual surely has at the moment is - what will happen to the depositors’ and investors’ monies
The money that will be collected after liquidation of NDB will be distributed to the stakeholders as per the order mentioned below.
- NDB’s staffs (salary)
- Savings account holders
- Fixed account holders
- Current account holders
However, all those investors who had applied to purchase right shares will get their money bank. As per NRB Executive Director Gopal Kafle "The money put on rights shares is still with NIDC Capital Markets, the issue manager, and will be excluded from the liquidation process,”. This means that the total of Rs 80 million of shareholders money is safe with NIDC and the respective investors will get their money back. In addition, the institutional investors like Employment Provident Fund and Nepal Army.
Lessons to be learnt
The need for rational decision making is increasing day by day. The liquidation process of NDB and the freezing of insurance accounts of National Life Insurance Co (NLICL) by NRB have certainly instilled some amount of skepticism, regarding investment in these sectors, in investors’ mind. But the fact is that we have learnt our lessons the hard way.
Investors tend to invest in Financial Institutions (FIs), sit back and relax hoping that it will perform well and if not, NRB will take over management and beautify the FI. The takeover of management of Lumbini Bank, and Nepal Bangladesh Bank had strongly put forward the position of NRB as the “Lender of Last Resort”. But the initiation of liquidation of NDB has shown that NRB, when needed, can take extreme position as well. In an open economy, some economists stress that worst performing FIs must be liquidated and not protected.
With the growing number of FIs in the market, NRB may also liquidate worst performing FIs in the future rather than encouraging them to go for merger and acquisition. Moreover the commitment, to WTO, to open up service sector for foreigners from 2010 onwards has mandated the national FIs to be strong enough in terms of capital base, capacity, human resource etc. Our national FIs must be able to compete with foreign FIs, if they come to Nepal after 2010. In this regard, the liquidation process of NDB seems to be a good step of NRB.
If you are an individual investor, please do not think that your investment in FIs will always pay well. Don’t sit back and relax after investing in any companies. Investors, in this regard, should be proactive to know the financial conditions of the companies where they have put their money.
For example, as per the financial statements, NDB net worth has been negative since last 4 years but its market per share was Rs 579 (as of Dec 17,2007), Rs 224 (as of Jan 26,2009) and the current market price, before NEPSE suspended its trading, is Rs 126. If one analyzes rationally, it becomes clear that any company with net worth on the negative side and negative reserves shouldn’t have market price per share more than its book value per share. All those who had analyzed this must have sold his/her stocks of NDB and those who didn’t are now repenting.
Hence, a thorough knowledge of a company’s fundamentals and its management is must for an investor. The buzz word here is to be wise and invest more wisely.
Let’s start to make decisions rationally.