BoK, HBL might have to wait for months before verdict on Melamchi case

ShareSansar, May 6:

Bank of Kathmandu and Himalayan Bank Limited might have to wait for a few more months if not till December 2015 before they could reclaim the money from a Chinese construction company for which they have provided a counter guarantee of in the form of a performance security of US$ 6.62 million and guarantee for advance payment of US$ 6.62 million and 1.4 million euros.

“As per the practice of Chinese judiciary, a court of law can issue the verdict on any case pertaining to foreign company at least three months to a year from the final hearing on the case,” a highly placed source at BoK told ShareSansar.

He further said that though they expected the verdict within a year, there are precedents when the verdict on such cases has been delayed by as much as two years.

“The final hearing on the case was conducted by the Chinese court in December,” said the BoK official. “We expect the verdict within a year. But the court had taken two years to settle a case of a Pakistani company which was quite similar to ours. We have, however, kept our fingers crossed.”

And then there is no guarantee that the court in China will deliver the verdict in favor of Nepali banks.

“Considering all possible scenarios, since last year we have, however, been maintaining a third of the total sum so that we can keep aside the entire counter guarantee sum within three years,” said the official.

It may also be noted that back in January Nepal Rastra Bank had asked BoK and Himalayan Bank to deposit Rs 6.6 crore and Rs 8.5 crore respectively at the central bank in a non-deductible condition.

Since a Chinese state-own bank had stood guarantee for the China Railway 15 Bureau Group with which the Melamchi project has terminated its contract in September 2012 for poor performance, and that the contractor has also charged the Chinese bank along with the two Nepali banks while moving the court on the charge “fraudulent claim”, the court is expected to give the verdict in favor of the banks, the official opined.

The China Railway 15 Bureau Group had been originally contracted to build 26.5 km long tunnel for the Melamchi project to fetch water from the Melamchi River to the Kathmandu Valley.

The Chinese company had gone on to filed a case against the Melamchi project as well as the Nepali and the Chinese bank in a Chinese court to withhold the guarantee amount following the termination of its contract.

Likewise, Himalayan Bank officials have set aside a reserve of Rs 22 crore, which we could have distributed to the shareholders as a contingency plan – in case the court does not rule in their favor.

But the officials of both BoK and Himalayan Bank maintain that the case has not affected their overall performance, especially their core business, and that the central bank’s directive will also not affect their business.

BoK core business hit by NRB’s spread rate directive

For the third quarter in a row BoK has reported a drop in its net profit.

According to the unaudited financial report for the third quarter the Bok has published only a few days back, its net profit dropped from Rs 42.78 crore in the third quarter of the last fiscal year 2069/70 to Rs 35.49 crore by the end of the third quarter of the current fiscal 2070/71.

It may be noted that the BoK had reported 17.25 percent drop in its profit in the second quarter of the current fiscal.

As per the financial statement of the commercial bank, the profit was largely stemmed by a provisioning of Rs 11.02 crore.

Its  core business has also suffered slightly as its net interest income has decreased from Rs 89.81 crore in the third quarter of the last fiscal year, down to Rs 88.76 by the end of the current third quarter.

But the senior BoK official said that it has no direct relation with the Melamchi debacle and that the money the bank has been keeping side as the contingency plan in the Melamchi case has not been shown as provision for possible losses in the quarterly financial reports published by the bank.

With regard to shrinking operational income, he explained that it was mainly due to the central bank’s directive to the banks to cap the spread rate in 5 percent.

“Maintaining the interest spread is the real challenge,” said he. “If you ask why our operational profit has been dropping then it is all about the spread rate. You can see in our third quarter report, we have brought down the average interest rate to 5.73 percent from 6.76 at the end of the corresponding quarter last year.”