The board meeting of NRB held on Sunday decided to declare the institution 'troubled' after it was not convinced with the strategies and reform plans in the clarification submitted by the LFC to the central bank for the improvement its financial condition.
NRB had sought clarification from LFC earlier on February, asking the finance company why it should not be declared troubled after finding negative net-worth, high non-performing loans and paid-up capital below the regulatory requirement, among other number of deficiencies, during its on-site inspection.
"The company's clarification and reform plan was not convincing. We also did not find any improvement in its financial health. Thus the central bank decided to declare the institution troubled-ridden for the protection of the interest of depositors, public investors as well as the institution itself," Min Bahadur Shrestha, spokesperson of NRB, said.
NRB had started on-site inspection of LFC based on its annual financial report of fiscal year 2013/14 as of mid-July. In course of on-site inspection, NRB found the capital adequacy ratio (CAR) of the finance company had reached 14.37 toward negative side. Similarly, NPL was at 70.65 percent and paid-up capital at Rs 187.9 million.
According to NRB requirement, finance companies should maintain CAR of 11 percent and paid-up capital of at least Rs 200 million while the NPL should not exceed five percent of the total loans.
"During the inspection, we also found that lending of the finance company to some borrowers was above the single obligatory limit set by NRB," Shrestha said, adding that the central bank will lift 'troubled' status once the finance company improves its financial indicators.
Similarly, NRB also found that the company's loan flow to the real estate sector was higher than the limit set by the central bank. The company was also found extending loan without adequate assessment of collateral and waiving off huge amount of principal and interest of some borrowers without any basis, among other shortcomings, according to a statement issued by NRB.
NRB has also issued 12-point instructions to the finance company. The central bank has instructed the finance company to maintain paid-up capital and CAR according to the regulatory requirement. Other instructions include restriction in deposit mobilization and returning of matured deposits. Likewise, the finance company has also been barred from issuing new loans. LFC will not be able to open new branches and it will have to seek NRB's permission to sell its fixed assets. The central bank has also restricted LFC from increasing perks and benefits of staff, hiring new staffers, and announcing and distributing dividends, among others.
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