Banking News – The Government of Nepal has provided policy facilitation for the establishment of a company to manage non-banking assets through monetary policy, a move that will assist the Nepal Rastra Bank (NRB) in managing non-bankable assets. The central bank had initially proposed the idea of setting up a company to manage these assets in the current fiscal year’s monetary policy. Following the NRB’s plan, the government has provided the necessary legal framework to facilitate the operation of the ‘Bad Bank’ (Asset Reconstruction Company) through a policy arrangement.

Until now, there has been no legal provision for the operation and establishment of asset management companies in Nepal. Consequently, the government has introduced an ordinance to establish this framework. The need for such a company became evident as bad loans and non-banking assets increased following the COVID-19 pandemic, affecting the financial sector.

With the introduction of the ordinance, the asset management company now falls under the service industry category, giving legal validation to the process of establishing such companies. The NRB has announced that a draft of the Asset Management Act will be presented to the Nepal Government for approval, which will lay the groundwork for setting up the Asset Management Company to handle non-performing and non-banking assets.

The government’s move to include asset management companies in the service industry also reflects practices in other countries, where asset reconstruction companies, backed by banks and the government, have successfully managed to recover loans from both banks and individuals. Experts believe that establishing a Bad Bank will strengthen relationships among financial institutions and prevent any cracks from emerging between them, as the bank will handle the recovery of funds from its members.

Manoj Ghyawali, CEO of Nabil Bank, highlighted that while the growth of non-banking assets continues, the establishment of a Bad Bank could benefit the banking sector by reducing non-performing assets (NPAs). Ghyawali suggested that the introduction of such a company would be especially beneficial during times when the economy is sluggish, as it could help reduce the bad loans plaguing the sector.

The concept of a Bad Bank is not new to Nepal. The NRB had previously set up a task force under Rajan Singh Bhandari to explore the management of collateral, bad loan recovery, and loan collection agencies. However, this proposal was put on hold due to the banks’ existing authority to handle loan recovery independently.

Learning from India’s Asset Reconstruction Companies (ARCs)

India’s experience with Asset Reconstruction Companies (ARCs) provides a potential learning model for Nepal. India established ARCs under the Companies Act to manage bad loans and non-banking assets, which had become a significant challenge for the Indian economy. With the goal of maintaining financial stability, India’s central bank, the Reserve Bank of India (RBI), oversaw the operation of these reconstruction companies.

ARCs in India operate based on guidelines issued by the RBI. The company’s shareholders are those who hold at least 10% equity capital in the company. This model could be adapted in Nepal, where the establishment of a Bad Bank might enable public investment, ensuring no financial difficulties for both the state and banks. Additionally, the Reserve Bank of India’s regulations allow ARCs to acquire assets through auctions or bilateral agreements.

Banking experts believe that Nepal can draw valuable lessons from India’s experience with ARCs, particularly in managing non-banking assets and improving financial sector stability. Banking analyst Anilraj Bhattarai noted that with the growing non-banking assets and rising bad loans in Nepal, managing these assets and separating bad loans from good banks is crucial. He emphasized that establishing an asset management company under an ordinance is a positive step, though the management of such a bank would require substantial capital investment.