Two banks lose Rs1.7 billion over troubled water project

  • Melamchi Drinking Water Project
- Post Report, Kathmandu
The episode has also become a learning curve for Nepali banks about the international guarantee system

Sep 19, 2018-Bank of Kathmandu and Himalayan Bank have failed in their effort to prevent Melamchi Drinking Water Project from pocketing the banks’ combined guarantee of Rs1.73 billion they had given to China Railway 15 Bureau Group, an ex-contractor of the project.

On Monday, the Supreme Court scrapped two separate writs filed by the banks in May 2015 demanding that Nepal Rastra Bank (NRB)—where they had deposited the guarantee amount—not to transfer the money into the account of the Melamchi Project.

The two banks had knocked the door of the Supreme Court after the then Patan Appellate Court (now High Court), scrapped their cases on April 19, 2015, forcing them to pay the guarantee amount.  

The banks were of the view that since the counter-guarantee, China Construction Bank, failed to release the counter guarantee amount, domestic banks should not be forced to pay the guarantee amount to the Melamchi Project as well.

The two banks lost the final battle in court after a joint bench of judges Hari Krishna Karki and Anandamohan Bhattarai of the SC on Monday scrapped the writs filed by the banks.

The banks said that the latest SC decision would not affect their balance sheet as the central bank had already released the funds to the Melamchi Project. “We have also made provisioning of the lost amount,” said Shovan Dev Pant, chief executive officer of Bank of Kathmandu (BoK).

The banks took a financial hit a few years back, when they provisioned for the lost amount. It hit their profitability in the fiscal years 2013-14 and 2014-15. The banks claimed that they could have generated extra income had the SC decided in favour of them.

The row over the guarantee amount erupted since Melamchi Water Supply Development Board terminated its contract with the Chinese contractor over poor performance in executing the project in September 2012.

After scrapping the contract, the Melamchi board had sought payment of a performance guarantee of $ 6.65 million (Rs773.52 million) from Himalayan Bank Limited (HBL) and guarantees for advance payment of $6.62 million (Rs770.03 million) and £1.4 million (Rs189.89 million) from Bank of Kathmandu (BoK).  

But, the Chinese contractor filed a fraud case against Melamchi at Zhengzhou Intermediate People’s Court, a local court which prevented China Construction Bank from releasing the amount to Nepali banks immediately.

Later, the court also issued a verdict in favour of the Chinese contractor in January 2015.

This is a rare example where a counter guarantee has been denied, according to the Nepali banks. The two Nepali banks have appealed to the higher court in China to appeal the verdict.

After the latest SC verdict, the banks said that they would seek to recover the amount by winning its legal battle in China.

About two months ago, the two banks also wrote to the Melamchi Board, telling them not to make any outstanding payments to the Chinese contractor.

 “We have information that there might be a certain amount to be payable to the Chinese contractor for the works it had done in the project, construction materials and construction equipments,” said Ashoke Rana, chief executive officer of Himalayan Bank.

But, officials at the Melamchi Board said that they don’t see any amount that might have to be paid to the Chinese contractor.

“We paid adequate amount to the Chinese contractor to work at that time. So, I don’t think any large amount will need to be payable. Even if such an amount appears, we will do as per the law and contract,” said Ram Prasad Kharel, deputy executive director of the Melamchi Project.

The episode has also become a learning curve for Nepali banks about the international guarantee system.   According to Rana, they have been issuing bank guarantee worth over $1million dollar to foreign companies on the

condition that any future dispute settlement be made in Nepali court.

He said that the two banks had also proposed similar proposal to the Nepal Bankers’ Association but the proposal failed to receive endorsement from the association.

Published: 19-09-2018 08:17

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