KATHMANDU, Dec 14: Nepal Rastra Bank (NRB) has removed Kuber Merchant Finance Ltd (KMFL) and Lalitpur Finance Ltd (LFL) from its list of 'problematic' financial institutions.
The central bank lifted the 'problematic' tag from these class 'C' financial institutions last week, asking them to meet certain requirements, including the requirement to raise minimum paid-up capital within two years.
The two institutions were declared problematic by the central bank after their financial health deteriorated due to haphazard lending practices and weak corporate governance. The NRB had declared KMFL as a problematic institution on January 7, 2013, while LFL was included in the list on March 30, 2015.
The central bank declares an institution 'problematic' when serious deficiencies are found in the institution including poor management, inadequate financial resources and weak asset quality after its corrective measures fail to bring the institution on track. If an institution is declared problematic, it is not allowed to perform regular banking operations.
The NRB officials say that the central bank decided to remove them from its list of problematic financial institutions after the central bank found 'remarkable' improvement in their financial indicators.
“There is a separate division within the NRB that keeps on tracking and monitoring the indicators of institutions which are declared problematic,” Narayan Prasad Paudel, an executive director at the central bank, told Republica, referring to Problem Bank Resolution Division.
“As the division found a remarkable improvement in their financial indicators, including their capital, non-performing loan ratio, recovery of bad loans, among others, they have been removed from the problematic institution tag,” added Paudel, who is also the spokesperson for the central bank.
According to NRB sources, these two institutions managed to secure fresh capital from new shareholders which also helped in their removal from the list of the problematic institutions.
Earlier this year, the NRB had removed Arun Finance Ltd and General Finance Ltd from its list of the problematic institution, allowing it to carry out its regular banking transactions. Seven financial institutions are still on the list of problematic institutions, according to Poudel. “Four of them will be removed from the list very soon,” he added.
A source at the Problem Bank Resolution Division of the NRB said that the central bank has adopted a strategy of allowing viable problematic institutions to operate if new shareholders come to inject the capital or another institution decides to acquire them.
KMFL and LFL have been told to raise their minimum paid-up capital within two years and submit the capital plan to the central bank within 35 days. Other conditions include lowering their bad debt ratio gradually to a regulatory requirement level, strengthening their corporate governance, and ensuring robust internal control system and risk management.
These institutions will not be able to lend more than 10 percent of their core capital to a single borrower until the conditions prescribed by the central bank are met, according to NRB officials.