The category C financial institution shut down operation from Friday, citing a shortage of cash to repay depositors.[break]
“Well around Rs 1 billion worth of loans -- 33 percent of its total loan portfolio -- have been issued in a faulty manner,” said a highly placed NRB source. Worse still, the loans have been issued by setting up fake borrowers and without proper assessment of collateral.
Given this situation, an inspection team of the central bank that took onsite stock of the firm a few weeks ago recommended to senior management to axe against its top brass for blatantly violating banking norms.
The finance company has pleaded for refinancing, referring to recent deposit withdrawals. “But we seriously doubt whether it has the ability to repay the money. With 33 percent loans remaining problematic, we do not think it will be able to pay back the refinance loans,” said the source.
The CMBF case, meanwhile, has subjected the central bank to a critical test. Top brass at finance companies including President of Nepal Finance Company Association Rajendra Man Shakya, are pushing the central bank to save the troubled company.
“Otherwise it might spark another spate of withdrawals from financial institutions, subjecting the whole system to risk,” he said. However, NRB officials said the company has no solid loans and governance record to deserve positive consideration.
“This has left us with a tough choice,” said the source, adding that the central bank would soon forward the matter to its board for a decision.
The company management blames recent rise in withdrawals, including premature withdrawal of fixed deposits, for its troubles.
However, that is not the whole problem. The bank issued loans far above its deposits and a majority of its loans are for land plotting and development.
The third quarter report of the company shows that it has issued Rs 839.38 million worth of loans for speculative land purchase and plotting. It has invested another Rs 295 million in different real estate projects and also issued loans worth Rs 1.02 billion to an undefined ‘others’ category. NRB says loans issued under other categories have also been provided to speculative land businesses in a deceitful manner.
“It had heavy exposure to risky products and yet did not develop a contingency plan to realize even 20 percent of that risky investment in case of emergency needs,” said the source.
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