ANNUAL REPORT

OF

THE DEBT RECOVERY TRIBUNAL

2003/04

Kamalpokhari, Kathmandu

Preface

Under the constitutional provision that power relating to justice in the Kingdom of Nepal is to be exercised by courts and other judicial institutions in accordance with the provisions of the Constitution, the laws and the recognized principles of justice, His Majesty’s Government has, by a notification of 2060.3.2(16 June 2003) in the Nepal Gazette, formed the Debt Recovery Tribunal to commence its business on 2060.4.1(17 July 2003).

The Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002) entrusts the Tribunal with the responsibilities of promptly and efficiently trying and settling cases related with the recovery of debts and contributing to the recovery of such principal and interest of debts due and payable by the borrowers. Since its very formation, the Tribunal is moving ahead in performing its duties of discharging justice promptly and speedily, by observing the principles of law and justice, established precedents, laws and procedures.

An acute problem of bad debts increasing in the banking sector causes negative impacts not only in the banking sector but also in the economy as a whole. The state has, paying special attention to the issues on the recovery of debts disbursed by banks and financial institutions, assigned such important responsibilities to this Tribunal, through enactment of a separate Act and Regulation for the settlement of such cases. A total of 94 complaints or cases were filed with the Tribunal as at fiscal year 2060/061 (2003/04), 30 cases were finally settled and the rest 64 cases have been carried over to fiscal year 2061/062 (2004/05). Despite a number of difficulties, the Tribunal has carried out its responsibilities in a significant manner even in such a short span of time following its establishment. It can, thus, be hoped that speedy progress will certainly be made in the coming years. Other detail information could be obtained from the study of the Report.

Similarly, in pursuance of the policy of publishing the details of works discharged by the Tribunal in each fiscal year as an annual report for information, the Annual Report of the first fiscal year 2060/061(2003/04) has been published for information to all the concerned. The Tribunal is hopeful and confident that the informed and reasoned readers will get information, albeit to some extent, from the details of the responsibilities assigned to the Tribunal and the activities carried out by the Tribunal. We would also like to express our commitment that we will keep on publishing much more information as annual reports in the years to come.

Magha 2061 (January 2005)                                            Debt Recovery Tribunal

Table of Contents

Part-1

Formation, Modus Operandi and Progress

1.         Background, formation and objectives

2.         Establishment and commencement of business

3.         Procedures

4.         Human and physical resources

5.         Hearing on complaints and petitions

6.         Jurisdiction and modus operandi

7.         Progress details

8.         Execution of judgments

9.         Other activities

Part-2

Problems and Suggestions

1.         Pre-conditions of filing complaints and petitions

2.         Jurisdiction of Tribunal

3.         Compromise

4.         Removal of possibility to file a case on the same debt in two forums

5.         Substantiation of claims

6.         Inspection and evaluation of security

7.         Service of summons

8.         Appointment of another body/ person as receivership for auction sale

9.         Physical facilities for special action on debt recovery

10.        Human resource training

11.        Proper provision of resources

12.        Making the Tribunal as a component of financial sector reform program

Part-3

Appendices:

(1)        Cases filed and complaints and petitions settled as at fiscal year 2060/061(2003/04).

(2)        Details of judgments of cases transferred from the District Courts and filed in the Tribunal.

(3)        Status of debt as per the security on the complaints and petitions filed as at 2060/061(2003/04).

(4)        Statements of budget received from His Majesty's Government and of expenditures.

(5)        Extensive details of petitions filed in and judgments made by the Tribunal.

(6)        Organizational structure of the Debt Recovery Tribunal.

(7)        The Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002) and the Regulation framed thereunder.

Part-4

Charts

(1)        Details of cases filed by banks and financial institutions in the Tribunal.

(2)        Details of cases filed directly in the Tribunal and of cases transferred from the District Courts.

(3)        Amount settled in the case of financial institutions.

(4)        Amount settled in the case of commercial banks.

Part-1

Formation, Modus Operandi and Progress

1.         Background, formation and objectives:

With the operation of commercial banks in joint venture in Nepal since 1984, economic activities of the country and investment in the banking sector have increased significantly. Currently, 17 commercial banks, 20 development banks and 59 finance companies are operating in Nepal. Along with the increase in the network of banks and financial institutions, bad debts of banks and financial institutions have also increased. The economic sluggishness in the country has contributed to further increase in such debts. It is noteworthy that bad debts has rapidly increased in Nepal for the last few years and reached around 25 percent of the total debts three years back. At the moment, of the total debts disbursed by commercial banks, around 29 percent debt has already become bad ; and two larger and older banks viz. Nepal Bank Limited and Rastriya Banijya Bank have already accounted for around 60 percent of such bad debts. In the banking sector, if the portion of such bad debt crosses 10 percent, it is considered precarious. According to the World Bank Study, the bad debt of the banking sector of our country has not only already reached 7 percent of Gross Domestic Product but also been increasing alarmingly. If we fail to control such negative trend in time, the financial condition of the country will keep on being ruined; and eventually the economy will get paralyzed.

In view of this fact, His Majesty's Government has, by a notification of 2060.3.2(16 June 2003) in the Nepal Gazette, appointed the date i.e. 2060.4.1(17 July 2003) for the commencement of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002) and the Regulation on Recovery of Debts of Banks and Financial Institutions, 2059(2003) framed under that Act with a view to providing for the original trial and settlement of cases on recovery of debts of banks and financial institutions in a prompt manner and the recovery of principal and interest of debts to be recovered from borrowers.  Then, the Debt Recovery Tribunal was formed on 2060.4.1(17 July 2003). This Tribunal has been established in Kathmandu, basically with a view to promptly and efficiently trying and settling cases related with the recovery of debts disbursed by certain specified banks and financial institutions in the Kingdom and contributing to the recovery of such bad debts.

Moreover, it is expected that the establishment of the Tribunal will result, directly or indirectly, in the following positive impacts on the financial sector of the country:

·         Prompt and easy resolution of the problems and issues coming across in the settlement of cases related with the recovery of debts disbursed by banks and financial institutions.

·         Decrease in the percentage of bad debts of banks and financial institutions.

·         Simplicity and promptness in the procedures of cases related with the recovery of debts disbursed by these bodies.

·         Debt administration will get on being efficacious which will result in further enhancement of the efficiency of the financial sector. Consequently, the contribution of financial sector to the governmental revenue will be further significant.   

2.         Establishment and commencement of business:

As mentioned in paragraph 1 above, His Majesty's Government has formed a three-Member Debt Recovery Tribunal, consisting of Mr. Raju Man Singh Malla, as the Law Member, Mr. Radha Krishna Poudyal, as the Banking Member and Mr. Hiranya Bhakta Pradhananga, as the Accounts Member, with effect from 2060.4.1(17 July 2003). The Law Member is the Chairman of the Tribunal, and in his absence, the Banking Member chairs the Tribunal. Similarly, Under Secretary Mr. Keshab Prasad Ghimire has been appointed to the post of Debt Recovery Officer who, collectively with other employees, is responsible for the execution of judgments made by the Tribunal. Initially, the Tribunal with a total strength of 12 employees including the Shrestadar Mr. Shrikrishna Bhattarai started its business in Baluwatar. Now, the Tribunal has a total strength of 40 employees and housed in New Baneshwor. Most of its employees are on deputation from His Majesty's Government while some are employed on contract basis.

3.         Procedures:

Legal practitioners for plaintiffs and defendants make pleadings on the complaints and petitions referred to the three-Member Tribunal on a weekly and daily basis. Following such pleadings, the Tribunal makes judgments on a majority basis. According to the legal provisions, in the absence of the Law Member, the Bench may sit and make an order but cannot pass a judgment. Hence, the presence and consent of the Law Member has been made mandatory in each decision. Moreover, there is a legal provision that when the Members of the Tribunal fail to make judgment by majority, the matter is to be referred to the appeal hearing authority for sanction. According to Section 24(2) of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), in trying and settling cases filed under this Act, the Tribunal has the same powers including to issue summons, summon presence of petitioner, defendant, witness, administer oath, take deposition, examine proofs, evidence and necessary documents or statements, require submission of documents, require furnishing of security and impose punishment as the court of law has under the prevailing law. Pursuant to Section 19 of this Act and Number 17 of the Chapter on Court Proceedings of Muluki Ain, a party who is not satisfied with any decision or judgment of the Tribunal may make an appeal in the appeal hearing authority.

4.         Human and physical resources:

The organizational structure of this Tribunal is appended to this Report. Accordingly, some employees inclusive of the Shrestadar (Gazetted III) have been on deputation from the Supreme Court, the Bank Officer and two Head Assistants from Nepal Rastra Bank, the Debt Recovery Officer and Non-gazetted employees from the Ministry of General Administration and the Accountant and sub-accountant from the Office of the Comptroller General; and some employees are employed on a contract basis (Appendix-6).

In fiscal year 2060/061(2003/04), the Tribunal procured telephone sets, tele-fax machines, photocopy machines, some computers, printers, web-page networking, three cars for Members, two motor cycles and some bicycles and necessary furniture. One jeep has been borrowed from Nepal Rastra Bank until another arrangement is made. In respect of the budget for fiscal year 2060/061(2003/04), a budget of Rs. 9,016,700.00 was sanctioned for the first year to make office arrangements including infrastructures, among others. Out of the budget, Rs. 3,000,000.00 was allocated for three motor vehicles, Rs. 520,000.00 for machinery and equipment and the rest for regular expenses (Appendix-4). On the whole, a total sum of Rs. 7,952,848.30 was spent by the Tribunal under the various headings. A total sum of Rs. 1,806,851.70 consisting of the debt recovery fee in a sum to be set by 0.25 percent of the claimed amount charged for filing cases and of the sum received for other fees was paid by the Tribunal to Treasury  in the same fiscal year fiscal year 2060/061(2003/04).

5.         Hearing on complaints and petitions:

Pursuant to Section 32 of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), the District Courts are not authorized to try cases related to debt recovery which are sub judice; consequently, a number of cases have started being transferred from the various District Courts since 30 Bhadra 2060 (16 September 2003); and commercial banks have also started filing complaints and petitions directly with the Tribunal. Again, Nepal Rastra Bank has also specified the provision contained in Section 3(d) of the Act to be applicable also for cases on recovery of debts of development banks and finance companies since Kartik 2060 (November 2003). Then, such banks and financial institutions have also been eligible to file complaints or petitions with the Tribunal. The Bench of the Tribunal sits almost every day. In the course of discharging its activities other than those specified by the Act and the Regulation, the Tribunal follows the procedures set by the prevailing law.  

6.         Jurisdiction and modus operandi

The Tribunal, which is competent to originally try and settle cases pertaining to the recovery of debts of the concerned banks and financial institutions, amounting to a principal of five hundred thousand rupees or more and recover such debts from other assets of the borrowers, is intended to be made more competent and effective through its empowerment by the concerned Act. It is to be noted that according to Section 16 of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), if, in respect of a case under its consideration, the Tribunal thinks, upon a petition of the plaintiff, that it is necessary to so withhold the security furnished for borrowing the debt or the movable or immovable property owned or possessed by, or title to which belongs to, the guarantor of the borrower as to prevent such security or property from being transferred, transmitted or sold, it may issue an interim order to the concerned office to withhold such property until another order is issued. Similarly, under Section 17 of the Act, the Tribunal must try and settle a case no later than one hundred fifty days from the date of submission of a note of defense where the note of defense is filed and from the date of expiration of the time limit for the filing of a note of defense where such note is not submitted.

According to the definition of a debt as contained in the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), the Tribunal may treat an arrear due and receivable from the off balance sheet transactions or fee, commission and interest chargeable for the same as tantamount to a debt; and pursuant to Section 26 (2) of that Act, a guarantor may also be considered as a principal borrower except as otherwise provided for in the written agreement or contract, and the debt or liability may be realized directly from that guarantor.

According to the law, the jurisdiction of the Tribunal is to originally try and settle complaints and petitions for the recovery of such debts valued at or more than five hundred thousand rupees as disbursed by banks and financial institutions. Since debts below five hundred thousand rupees are outside the jurisdiction of the Tribunal, the banks and financial institutions have to recourse to the District courts as usual for the recovery of such debts.

As a judicial body, the Tribunal has to make judicial settlement as well as carry out activities for the recovery of such amount as decided by it from the borrowers in the time set by it, by auctioning the security. For the purpose of the recovery of a debt, the Debt Recovery Officer may, with the assistance of the security body, take possession of the movable and immovable property furnished as security, valuate and auction the security and, in view of the circumstance, proceed with action by detaining the borrower and the guarantor in accordance with the law. In such a situation, the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002) is silent as to how long the Debt Recovery Officer may detain the concerned person/guarantor and who is to provide for ration during that period and how much.

Cases may be tried and settled by the Bench attended by two Members including the Law Member of the Tribunal (who acts as its Chairman). The Shrestadar is entrusted with responsibilities such as to study the documents attached with a compliant or petition submitted to the Tribunal to see whether the requirements are met and the claim is clear, register such complaint or petition and perform administrative business.

When, upon having heard a complaint or petition filed by a bank or financial institution, the Tribunal makes a judgment for the recovery of a debt form the borrower and the guarantor, the Shrestedar gives its information in writing to the Debt Recovery Officer; and then the execution process commences. However, this process is to be deferred until the expiration of time limit for filing an appeal by an unsatisfied party in the Appellate Tribunal. Generally, the Bench has specified a period of 4-5 months for the Debt Recovery Officer to recover the set sum of debt from the borrower to the concerned bank or financial institution. In this context, the Tribunal has experienced a number of obstacles such as failure to avail of the assistance of the governmental security body in time to possess the movable and immovable property furnished as security, requiring the occupants of concerned houses to vacate them, inadequacy of the security to cover the debt and failure of the petitioner bank to show additional security of the borrower.

However, no bank or financial institution has filed a complaint or petition in the Tribunal against any big trading house or borrower. The case involving the biggest amount ever filed in the Tribunal is the case filed against Agriculture Inputs Company Ltd. for the recovery of a debt amounting to around 130 million rupees under the import letter of credit disbursed by the Himalayan Bank Ltd. It was decided on 2061.3.27 (11 July 2004). The Tribunal can allow a case to be compromised in the course of its trial. Accordingly, a case with a claim of 21.7 million rupees was compromised based on the understanding of both the plaintiff and the defendant and their joint application in fiscal year 2060/061(2003/04). 

7.         Progress details:

Out of a total of 94 cases filed in the Tribunal in fiscal year 2060/061 (2003/04), 39 cases (41.5%) were transferred from District Courts and 55 complaints/petitions (58.51%) were directly filed in the Tribunal. Out of a total of 65 cases related with the banking sector, 18 cases were transferred from District Courts and 47 complaints/petitions were directly filed in the Tribunal. Among a total of 29 cases related with the finance companies, 21 cases were transferred from the District Courts and only 8 complaints/petitions were directly filed in the Tribunal. Hence, the banking sector accounts for 69.15% of the total number of cases i.e. 94 filed in the Tribunal whereas the finance company sector accounts for 30.85%.

The various 65 cases filed by the various commercial banks in the country against defaulters amounted to a total claim of 817.6 million rupees. Nineteen cases have been adjudged; and in the course of recovery of 356.5 million rupees (43.61%), the Tribunal has already issued a written order for the recovery of 328.9 million rupees. Hence, 19 cases (29.33%) of 65 cases filed by the banking sector have already been settled.

Out of a total claim of 68.9 million rupees in a total of 29 cases filed by 10 finance companies/financial institutions, a sum of 27.7 million rupees has gradually undergone the process of recovery following judgments on 11 cases (37.93%).

Hence, a total of 94 cases filed by the banking sector and finance companies amounts to a total claim of 878.4 million rupees. Out of the cases on both sides, 30 cases have been settled and a sum of 356.6 million rupees is in the process of recovery. Thus, 31.91% of cases have been settled.

A claim of 12.6 million rupees involved in the case, with registration number 14, Nepal bank Limited vs. Nepal Orient Magnesite Private Limited has been dismissed, the claim of 129.1 million  rupees in the case, registration number 33, Himalayan Bank Limited vs. Agricultural Inputs Company, has not sustained. In the case, registration number 27, Himalayan Bank Limited and Aang Kami Lama, a claim of 22.2 million rupees has been made; but on computation, it has been held to amount 328 thousand rupees only. This case has been referred to the Kathmandu District Court since this Tribunal has no jurisdiction to try a case with a principal of less than 500 thousand rupees. Out of the settled cases, 16 cases have been settled in favor of the banks and 11 in favor of the finance companies.

As indicated in Appendix-2, the 20 biggest loans appear to have been disbursed from the working capital heading. The loans disbursed under other headings include 16 under overdraft, 15 under hypothecation, 10 under project loan, 8 under commercial loan, 8 under trust receipt loan, 6 under hire purchase, 6 under prior export loan and 5 under other headings. Cases have been filed in respect of these loans. As mentioned in Appendix-3, from the viewpoint of security, there appear a total of 13 loans disbursed by the banks and financial institutions only against personal guarantee. The amount of loans with no security whatsoever accounts for 13.83% of the total claim. Similarly, the loans with no personal guarantee or security appear to account for 1.08%. In respect of hypothecation loan, loans disbursed against security of jute and jute products accounted for 1.06%. It is learnt that the jute was looted, and a case in this regard is under consideration of the Appellate Court, Biratnagar. It can be said that almost all cases filed in the Tribunal involve loans related with the working capital, except for project and bank guarantee loans. This shows that cases related with loan for fixed capital, housing loans, loans against shares or other financial instruments have not been filed in the Tribunal.

It also appears that claims have been made for the remaining amount to be set by adjusting the proceeds of public auction of the security held by banks and financial institutions with 18.7 million rupees which is 2.13% of the total claim of 878.4 million rupees. There is no security against such claims. On the other hand claims have been made for the amounts remaining after making adjustment of the proceeds of the sale of the movable and immovable property held by banks and financial institutions from borrowers with the receivables, there is no security for such debts as well. Hence, there is a very low possibility to recover a total of 25.55% of the total claim, including 13.83 % with merely personal guarantee, 2.13% with merely personal guarantee after auction sale, 7.45% with no security remaining after the acceptance and buying of the security, 1.06% with debts which were disbursed against security of movable property, which was subsequently embezzled, and ultimately which had no additional security, and 1.08% debts (2.4 million  rupees) having been disbursed against no security.

8.         Execution of judgments

Given that after a judgment by the Tribunal, an unsatisfied party may file an appeal within a certain period of time. Thus, it may take some time. However, after the judgment by the Tribunal, it has sent missions to recover debts, which have possessed such movable and immovable properties, vacated such buildings/houses and published notices in the Gorkhapatra for auction sale of such properties and buildings as owned by the borrowers in Dharan, Biratnagar, Jorpati VDC and Kamaladi of Kathmandu. In some cases, cash has been realized from the borrower and made available to the concerned financial institution.

The Tribunal has experienced difficulty with the execution of its judgments for a plethora of reasons such as: the borrowers have borrowed debts by having the security over-valuated in connivance between the borrowers and the employees of banks and financial institutions; debts have been disbursed without having security of immovable properties; petitioners/complainants have failed to assist by showing other property of the borrowers to the Tribunal; even the plaintiffs have not been able to find out the address and whereabouts of the borrowers; such land overrun by the river/requisitioned by the government has been accepted as security; the borrower companies have already been closed; the borrowers have gone abroad and there are no other persons to furnish security; the foreigner personal guarantors have absconded; banks and financial institutions have not taken personal guarantee of qualified persons. These facts amply suggest that petitioners/complainants themselves should be much more vigilant and be able to disburse debts properly by preventing the overvaluation of immovable property while disbursing debts, recognizing the personal guarantee furnished by eligible/reliable persons only and being effortful to find out additional immovable properties of bad borrowers. Thus, they should contribute to create a favorable environment for the recovery of debts in pursuance of the judgments by the Tribunal. 

9.         Other activities:

Amendments were made to certain Rules of the Regulation on Recovery of Debts of Banks and Financial Institutions, 2058(2002) in Magha 2060 (January 2004). These amendments seek to clarify the provisions on the service of summons and the prerequisites, as contained in sub-section (7) of Section 14 of the Act, that the petitioner bank and financial institution should have held and carried out ample discussions and activities with the borrower to settle, or cause to be settled, the debt and that such bank and financial institution took adequate action on the recovery of debt but the debt could not be recovered.

As and when so required on a claim made by the plaintiff or defendant, the Tribunal has also obtained reports from teams deputed by it to hold a public inquiry as to whether the concerned industry or house and land or abode of the defendant is in the specified place or whether the defendant has gone abroad. In this fiscal year, such missions for various purposes have been deputed in places such as Birgunj and Kathmandu.

The Debt Recovery Tribunal and Nepal Rastra Bank jointly organized an interaction program on "Recovery of Debts of Banks and Financial Institutions" in Kathmandu on 4 Chaitra 2060 (17 March 2004). The Program was participated in by these two bodies as well as by the Supreme Court, the Ministry of Finance, the Commission for the Investigation of Abuse of Authority, the Debt Recovery Appellate Tribunal, the Ministry of Law, Justice and Parliamentary Affairs, the Revenue Investigation Department, the Nepal Bankers Association, the Nepal Finance Company Organization and the Credit Information Center, among others.

The Tribunal also held consultations, from time to time, with the lawyers, financial advisers of the World Bank, International Monetary Fund and DFID and their representatives based in Kathmandu.

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