World Merchant Banking and Finance, General Finance Limited, Lalitpur Finance Limited and Nepal Finance Limited (Nefinsco) drew attention of Nepal Rastra Bank for failing to maintain corporate governance, accumulating huge chunks of bad loans, extending credit to promoters and deteriorating their capital position, among others, according to a person privy to the issue.[break]
“Nepal Rastra Bank (NRB), the banking sector regulator, has already sought clarification on why prompt corrective action should not be taken against them,” the source said. “If their answers are not satisfactory, the regulator will put them under strict surveillance. If their situation does not improve even then, they will ultimately be declared troubled.”
Although the source did not reveal problems faced by each of the category ´C´ financial institution, their unaudited balance sheets show they had overtly exposed themselves to the real estate market which has remained stagnant, collected big chunk of bad debts, maintained credit portfolio that outstripped deposit portfolio and set aside significant capital for possible loan loss purpose. These problems led them to bear operating or net losses last fiscal year.
Nefinsco, the first private sector-led finance company, for instance, posted a net loss of Rs 49.62 million in the last fiscal year ended July 15, while Lalitpur Finance recorded an operating loss of Rs 17.38 million in the same year, their unaudited balance sheets show.
Although the fourth-quarter financial reports of World Merchant and General Finance were not available, their unaudited third-quarter balance sheets show they were in the red as well at that time.
Part of the problem faced by these finance companies was due to over exposure to the real estate sector.
Lalitpur Finance, for example, had extended Rs 778.71 million in loans to the real estate sector till last fiscal year, which is almost 46 percent of the credit portfolio of Rs 1.71 billion.
Despite extending all these loans, the balance sheet of the company, which is planning merger with Progressive Finance and other similar institutions, does not show a single penny allocated for loan loss provision, whereas the regulatory provision makes it mandatory for all banks and financial institutions to create a cushion by setting aside certain amount even if the credit is of ´good´ quality.
World Merchant, which had maintained a credit portfolio of Rs 842.37 million as against deposit portfolio of Rs 615.15 million till third-quarter of last fiscal year, too had exposed itself heavily to the real estate sector.
The finance company´s third-quarter report of last fiscal year shows it had extended Rs 268.39 million in loans to the real estate sector, which is around 32 percent of the total credit portfolio. And as the credit recovery pace turned sluggish, the finance company started facing problems.
Nefinsco too has become a victim of slow recovery of loans. As of fourth quarter last fiscal year, the company had set aside Rs 56.59 million for possible loan losses.
The amount is more than twice the amount set aside till the third quarter of the last fiscal year. This shows problem in recovering loans had deteriorated in the fourth quarter. At the same time, the reserve and surplus of the company - components of the core capital - had fallen into the negative territory by the end of last fiscal year from a positive of Rs 82.98 million a year ago.
General Finance, on the other hand, whose chief Raju Kumar Pradhan was arrested for embezzling Rs 78.25 million of the company´s fund around three months ago, suffered heavy losses due to delay in payment of interest by borrowers, which led it to post an operating loss of Rs 25.94 million and net loss of Rs 11.48 million in the third quarter of last fiscal year.
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