Insider lending taking its toll on banking


Jun 17, 2013-

Officials of seven development banks faced the Nepal Rastra Bank’s (NRB) action for insider lending. These seven are among the 12 development banks that faced the central bank action in the last fiscal year for governance-related issues.

Senior Officials of Narayani Development Bank, Kabeli Development Bank, Pathibhara Development Bank, Infrastructure Development Bank, Uddyam Development Bank, Excel Development Bank and Khadbari Development Bank were taken action after finding their involvement in insider lending, according to the NRB’s Development Bank Supervision Report.

Also, a majority of the 11 finance companies that faced the NRB action last year were found involved in insider lending against the banking norms, according to the NRB. Some of the finance companies include Crystal Finance, Capital Merchant and Finance, Kuber Finance, General Finance, Baibhav Finance and Progressive Finance.

The report also showed that 11 financial institutions that were declared crisis-ridden were the victims of insider lending.

This reflects how insider lending is taking its toll on the banking sector. In the latest incident at Siddhartha Development Bank, insider lending led to the arrest of former Kist Bank Managing Director Kamal Gyawali’s wife Gauri Khanal, while Gyawali himself had to resign from his post.

According to the Central Investigation Bureau (CIB) of Nepal Police, a loan worth Rs 130 million provided by Siddhartha to Jamko Publication was deposited in Khanal’s account in Prime Bank on the same day.

Jamko’s proprietor Jishor Dhakal also took an additional Rs 120 million loan from Kist Bank, which Dhakal has claimed to have gone to Gyawali, according to NRB officials.

The Bank and Financial Institution Act (BAFIA) has barred directors, chief executive officers and promoters having more than 1 percent stake in any bank or financial institution (FI) from taking loans from their own institution.

However, the practice of taking such loans by creating fake loans in collusion with directors of other financial institutions and from the inter-bank deposits has been prevalent.

In some cases, even the central bank is unknown about extent of the trouble in FIs and continues to put its deposits in them. The NRB had deposits in Nepal Share Market and Finance (NSMF) when it landed in trouble.

The NSMF, which was in the process of upgrading itself into a commercial bank, increased its paid-up capital to Rs 2 billion from Rs 400 million within a short period. “Surprised by the sudden increment in the capital, we sent our team to find out how it was achieved. But they didn’t cooperate with our team,” said a senior NRB official. “Then, we demanded the details of loans, but we were provided with fake loan files created by using photocopies of citizenship certificates of depositors.”

As much as 98 percent the capital added was created from deposits just to monopolise the rights shares by Yogendra Shrestha, immediate executive chairman of NSMF. Later, the company’s due diligence audit identified that Rs 1.72 billion was embezzled by creating 96 fake loanees.

Similar was the case in Capital Merchant and Finance, which was also gearing up to increase its capital to become a commercial bank.

NRB Spokesperson Bhaskar Mani Gyawali said it is natural that the central bank knows about insider lending in FIs only after incidents take place. He, however, said increased penetration of BFIs amid limited supervisory capacity of the central bank also aided insider lending.

According to Gyawali, as BFI directors wanted to invest in the real estate sector when it was booming, a majority of them took loans from their own financial institutions by creating fake loanees or by other means.

Bank directors and chief executives used different methods to get loans from their own financial institutions. For example, Laxmi Bahadur Shrestha, former director of Nepal Bangladesh Bank received loans from NCC Bank by creating a fake loanee in the name of Dipak Nar Singh Shrestha which remained unpaid for long, according to a banker in knowledge of the matter.

“He also took many loans from Nepal Sri Lanka Merchant Bank (NSMB) indirectly by first putting NSMB’s deposits in other financial institutions and taking loans against those deposits,” said the NRB official.

In a similar case at Siddhartha Development Bank, one of the former directors received Rs 100 million loans from Prudential Finance by putting Siddhartha’s deposit in the finance company, according to an NRB official.

In order to control insider lending, the central bank has adopted a policy that requires CEOs and directors to submit their loan details to their banks and show the details to central bank supervisors. Earlier, it was provisioned that such loans should be disclosed in their audit reports. “We changed the policy later because disclosing personal information would not be practical as banks themselves vow not to make public about their client’s information,” said NRB’s Gnawali.

Published: 18-06-2013 09:15

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