Release of the payment a major financial reprieve for the Nepali commercial bank that would otherwise require huge provisioning for losses

KATHMANDU, June 9:  In what appears to be a big financial relief for Nepal Investment Bank Ltd (NIBL), the commercial bank said it has won a legal battle in an Italian court to secure counter-guarantee payment of nearly Rs 2.1 billion from its Italian counterpart Intesa Sanpaolo SPA in relation to Tanahu Hydropower Ltd.

NIBL— one of the largest commercial banks of Nepal — was fighting a legal battle in Italy for over a year after the Italian bank refused to compensate NIBL for the guarantee amount it had paid to Tanahu Hydropower Ltd.  A local court in Italy on Tuesday quashed a legal case preventing the Italian bank to make the counter guarantee payment to its Nepali counterpart, according to NIBL. A bank guarantee refers to a pledge that the bank will be liable if its client fails to fulfill its obligation.  

This ‘victory’ in the court and release of the payment also insulates NIBL from possible provisioning of 100 percent of the losses by mid-July that could have dealt a huge financial blow in the current fiscal year.  

The legal case ensued after the Italian bank refused to compensate NIBL the payment of nearly Rs 2.1 billion for the guarantee it had issued to Italian Cooperativa Muratori e Cementisti di Ravenna (CMC) for Tanahu Hydropower Ltd. Tanahu Hydropower Ltd claimed and received the guarantee payment from NIBL after terminating the contract with the ailing Italian company CMC over its dismal performance to build Tanahu Hydropower Project. CMC is the same Italian contractor which had also abandoned the Melamchi Water Supply Project last year, throwing the much-awaited mega drinking water project into chaos for months.  

While the bank paid the guarantee amount to the hydropower company, Intesa Sanpaolo, which had issued the counter guarantee worth Rs 2.1 billion (Rs 851.42 million in Nepali rupees in addition to 8.75 million in Euro) on behalf of the CMC, declined to compensate the Nepali bank.

According to NIBL officials, the Italian bank turned down their request to release the payment that they had made to Tanahu Hydropower Ltd citing a stay order from Italy’s local court, Tribunale Di Bologna. Even in the subsequent hearings, the court had refused to revoke its stay order to make payment to NIBL. However, a full-bench of the same court on Tuesday revoked its previous stay order that had prevented the Italian bank to pay the bank guarantee amount to NIBL.

The local court’s move elated the executives of NIBL which would have been required to make loan loss provisioning of over Rs 2 billion if it had not won the case. The loan loss provisioning of this magnitude means a serious blow to the bank and its profitability.

“The court decision to quash its previous order has paved the legal way for us to claim the bank guarantee from the Italian bank. With the release of the money, we would not be required to provision the losses by Asadh end [mid July],” Jyoti Prakash Pandey, the NIBL’s CEO, told Republica Online. “This legal victory is also beneficial for the country as it is also about receiving foreign currency,” he added.  

“Protection from loss provisioning only if the payment is realized”

A senior official at Nepal Rastra Bank (NRB) told Republica Online that the loss provisioning requirement will depend on the realization of the counter guarantee payment from the Italian bank.

“NIBL will not have to provision the losses only if the payment from the Italian bank is credited to its account,” said a senior official at the Bank Supervision Department of the NRB, requesting anonymity as he was not authorized to talk to the media. “If the payment is not realized, the bank will have to provision 100 percent losses,” he added.

In line with the instruction of the central bank, NIBL had already retained nearly half of the payment guarantee amount, or Rs 990 million, in a reserve fund. The guarantee payment amount at that time was lower due to foreign exchange rate.

According to a source at the NRB, NIBL was asked to retain a part of its profit in its reserve fund to make sure that it does not have to face financial shock in case the court decision does not come in the bank’s favor. Had the bank lost the legal battle in the Italian court, it would have to provision 100 percent of the losses. The loss provisioning would have severely hit the bank’s profit at a time when COVID-19 and containment measures to stop the spread of the coronavirus are going to put a pressure on its balance sheet.  

 
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