NB Insurance kept Rs 35.3 million in two-year fixed deposit account of Hetauda-based World Merchant Banking and Finance Company around six months ago. [break]Since the finance company is facing financial crisis, it has said it is not in a position to make premature delivery of the fund.
It is essential for NB Insurance to get this money back as the law bars insurers from depositing more than three percent of gross amount allocated for investment purpose in one finance company. Since the amount parked by the insurer crosses the limit set by the Insurance Board, the regulator has set restoration of the fund in accounts of commercial banks as condition to lift the suspension.
It is also necessary for NB Insurance to get back the money as the amount was transferred by misappropriating cash lying in the ´earmarked fund´ - which is made up of amount parked in reserve fund, insurance fund, unexpired risk reserve and outstanding claim reserve.
At the end of fiscal year 2010/11, NB insurance had around Rs 140 million in the ´earmarked fund´. Although the law bars insurance companies from using any amount from this fund, the regulator detected flight of around Rs 70 million from the reserve, of which Rs 21.5 million deposited at Nepal Housing and Merchant Finance Limited was recently transferred to various commercial banks and Rs 15.3 million are lying in call and current accounts of different finance companies.
But a huge chunk of money - Rs 35.3 million - currently lies in the troubled World Merchant Banking and Finance Company.
“Although the promoters of the insurance company have asked us to return back the money prior to its maturity period, we are not in a position to do so as it will shrink our deposit base and further distort credit to core-capital cum deposit (CCD) ratio,” a high-ranking official of the finance company told Republica, preferring anonymity as he said this was a confidential matter.
Currently, Nepal Rastra Bank (NRB), the banking sector regulator, has fixed CCD ratio at 80 percent. The CCD ratio is calculated by dividing loans disbursed in local currency by the sum of local currency deposit and core capital - also known as tier one capital, which includes equity capital and portion of net income retained by institutions. This outcome is then multiplied by 100 and it should not exceed 80.
Till the end of the third quarter of last fiscal year ended July 15, World Merchant´s CCD ratio stood at 105.68 percent. Although the company has not uploaded its unaudited balance sheet of fourth quarter on its website, the source of the finance company said the ratio hovered at 95 percent mark at the end of the fourth quarter, which is way beyond the limit set by the banking sector regulator.
The finance company has not been able to manage the CCD ratio because deposits of around Rs 650 million mobilized by the finance company falls short of loans of around Rs 820 million issued by it. Besides, the company with a negative reserve and surplus of Rs 92 million as at third quarter, has not been able to retrieve loans extended to the real estate sector. This has not only forced the company to continuously increase provisioning amount but incur net loss as well.
NRB Spokesperson Bhaskar Mani Gyawali, on the other hand, said any bank and finance institution will have the prerogative over not returning amount parked in the fixed deposit account. “In case such depositors are in need of cash, they can acquire loans against the deposited amount,” he said.
But even if NB Insurance gets loan against the fixed deposit, this will only fulfill one criterion of restoring the amount embezzled from the earmarked fund, the Insurance Board has said. The company will continue to be violating the investment policy introduced for the insurance sector, which bars insurers from parking more than three percent of gross amount allocated for investment purpose in one finance company, the Board added.
Laxmi Bahadur Shrestha, director of NB Insurance, meanwhile, did not comment on the issue.
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