Part-2

Problems and Suggestions

1.         Pre-conditions for filing complaints and petitions:

As per clause (c) of Rule 4 of the Regulation on Recovery of Debts of Banks and Financial Institutions, 2059(2003)(with the First Amendment), prerequisites are considered met when the lender has made and held frequent correspondences, discussions or negotiations with the borrower or rescheduled or restructuring of such debt or carried out similar other activities. However, according to clauses (a) and (b) of sub-section (7) of Section 14 of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), it is required that the petitioner or complainant financial institution should hold and carry out ample discussions and activities with the borrower to settle the debt, and that institution should take adequate action on the recovery of debt but the debt could not have been recovered. So, the Tribunal should examine whether the complainant or petitioner financial institution has fulfilled such prerequisites or preconditions as required to be fulfilled by it prior to filing a complaint or petition. The meaning and essence of the provisions contained in these clauses (a) and (b) might differ from person to person. This could create confusion in the course of imparting justice. So, for the solution of the problem, it is expedient to amend the Act to further clarify these provisions. 

2.         Jurisdiction of Tribunal:

According to the proviso to clause (d) of Section 3 of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), that the provisions of this Act do not apply to the recovery of a debt of which principal is less than 500 thousand rupees. This provision has created a condition that a bank or financial institution has to recourse to the District Court to have recovered a debt less than 500 thousand rupees and to the Tribunal to have recovered a debt more than that. This implies that such bank or institution should recourse to two forums in respect of the same subject matter i.e. debt recovery. So, this provision should also be amended so that the Tribunal may also have jurisdiction over a debt irrespective of its quantum. This would ease the debt recovery system in tandem with the spirit of the Act.

According to the present legal system, in cases where the property furnished by the borrower as the security of a debt to be borrowed from a bank or financial institution is auctioned, the borrower or third person having furnished security who is not satisfied with the auction may file a case in the concerned District Court on invalidation of auction on grounds that the auction has been made in an illegal manner. It has created a situation that the Tribunal tries the case of recovery of a debt while on the other hand the District Court tries the case on the security of which auction sale is required to recover the debt. It has thus created certain complexity. Again, a debt recovery case and auction invalidation case are directly interrelated with each other. So, the Tribunal should also be empowered to try auction invalidation cases.

Similarly, there is a provision that where a judgment is handed down that a debt is recoverable as per the plaintiff bank or finance company's claim, the Tribunal should execute that judgment by recovering the debt from auction sale of the security in favor of the plaintiff. However, where the concerned borrower is linked with export transactions or has otherwise deflected foreign currency, there is also likelihood that foreign currency reserve may also be affected. But, in such a situation, the Tribunal has no powers to make and execute a judgment that the debt is recoverable from such borrower in foreign currency. Hence, legal provisions should be made so that the Tribunal is so empowered and that a borrower who is required to import foreign currency from abroad is not allowed to repay the debt in Nepalese currency instead of such foreign currency.  

3.         Compromise:

According to Section 20 of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), if both parties of any case yet to be tried and settled so agree, the Tribunal may execute compromise irrespective of the stage of proceedings of that case. In view of the spirit and essence of this Act and practicality, it appears necessary that provisions should be added that even in the event that a case has already been tried and settled, the Debt Recovery Officer might execute compromise where both parties so agree in writing.

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

According to Section 15 of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002), only a bank or financial institution can file a complaint or petition in the Tribunal in respect of a bank debt. However, given the existing legal provision, a borrower should file in the District Court a case against a bank or finance company and go to the Appellate Court to have an interim order issued. There is a trend that before a bank or financial institution files a complaint or petition against the borrower or the person furnishing security or after knowing that such complaint or petition has been filed, such borrower or person may file a case in the District Court for the calculation of debt. Hence, in the current situation in respect of the same debt, two case namely a debt recovery case and a case on calculation of debt may be filed. One case may directly affect the other. In the course of settling a debt recovery case, it is necessary for the Tribunal to require the bank to furnish all details and statements related with the defendant borrower and analyze and ascertain the same.

So, necessary amendments should be made to the existing legal provisions so that the Tribunal is also empowered to try the counter claim on the amount of the borrower. This would resultantly remove complexities on the discharge of justice.

5.         Substantiation of claims:

Any bank or financial institutions filing complaints or petitions in the Tribunal for the recovery of bad debts are expected to have their claims clearly substantiated by the concerned statements of account, bonds or equivalent evidence. However, for the convenience of customers, most of them have disbursed debts by drawing cheque of current account. The borrowers who have borrowed debts in this way are also found to counter claim that they had withdrawn money from their own accounts. Despite that it is mandatory for the plaintiff bank or financial institution to prove its claim amount at the very time of filing a complaint or petition, the Tribunal would make orders at various times to summon the submission of the statements of account and examine the same. This has consumed much time of the Tribunal and the petitioner bank/financial institution.

Similarly, if the petitioner/complainant banks and financial institutions follow the directions issued by the Nepal Rastra Bank such as obtaining personal details of the personal guarantor and of his immovable properties, acceptance and buying of the immovable property furnished as the security and obtaining reports form a bank in the course of inquiring into the goodwill of a foreign exporter while opening an import letter of credit to import goods from abroad, the debt transactions will be more regularized, the possibility for a debt to become bad will lessen and even if it becomes bad, it will be easier for the Tribunal to have its recovery.

In the similar vein, if the banks and financial institutions disburse debts paying attention to the full security and utilization of debts and project feasibility, subject to the directions issued by the Central Bank and their respective debt investment policies, it appears that the problem of debt recovery will decline to a large extent.

There is a trend that the banks and financial institutions disburse debts without well identifying the persons/firms/companies seeking to borrow debts. Consequently, the same person/firm/company is found to have borrowed debts from various banks and financial institutions and failed to repay the same. In this context, it appears necessary that the Nepal Rastra Bank should issue proper directions such as that disbursement of a debt by one bank or financial institution to a customer of another bank or financial institution is conditional on the submission of a no-objection evidence issued by that other bank or financial institution of that customer or on the well identification of the customer.     

6.         Inspection and evaluation of security:

Various cases show that the banks and financial institutions have not inspected and valuated the security in a reliable manner prior to the disbursement of debts. Consequently, there is a very low possibility of recovering the debts by way of auction sale of the security on the execution of the judgments by the Tribunal. Even though it appears in paper that banks and financial institutions have caused the borrowers to pay the margin amount at the time of disbursing the debts, the margin, being very low in reality, is not satisfactory. While getting the debt facility utilized through the current account, the limit of the approved debts has exceeded and it has also been overdrawn. The approved letter does not indicate anything about other fees except the debts but the petitioner banks and financial institutions have paid up hundreds of thousand rupees for the same. The banks and financial institutions have not been able to receive monthly/tri-monthly statements from the borrowers whom they have lent hypothecation debts or working capital. Consequently, the debt administration has not been efficient and strong. Ultimately, it has contributed to cause negative impacts on the debt recovery. If the petitioner/claimant banks inspect and evaluate the security in a reliable manner, they will be in a position to regularly know about the business status of the various borrowers, and the practice of doing overvaluation of the security will be discouraged. This will in turn lessen the burden of the banks and financial institutions to take legal action for the recovery of their debts; and eventually they will also be able to save time and resources.

7.         Service of summons:

The District Courts are not compelled by law to serve with priority the summons issued by the Tribunal. This fact has caused delay and complexity on the process

of the service of summons issued by the Tribunal. Because of the resources, the Tribunal is not able to send its own personnel to serve the summons in all the 75 Districts under its jurisdiction. On the other hand it is almost impossible to serve the summons abroad owing to the lack of clear legal provisions. Hence, it appears necessary to amend the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002) to make necessary provisions in this regard.

Similarly, Section 18 of the Act on Recovery of Debts of Banks and Financial Institutions, 2058(2002) provides that where the concerned parties or their attorneys are not present at the time of making a decision, information of the decision must be sent to them within seven days of making the decision. Clause (a) of sub-rule (22) of Rule 22 of the Regulation framed under that Act stipulates that the Debt Recovery Officer is to give an order to the borrower to repay in full the principal and interest of the debt repayable by him to the bank or financial institution, by giving a time limit of seven days in maximum. For the purposes of these provisions, the summons is to be served. In this context, it appears necessary to amend the said Act and Regulation to provide that a notice is to be published in a national daily newspaper with the assistance of the plaintiff/petitioner for the said purposes, as well, and that when such notice is published, the summons is deemed to have been served. The texts of the said Act and the Regulation are appended hereto.

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

The Act needs to be amended to make provisions that any other body or person may be appointed as a receivership for the auction sale of such security or other assets of the borrower or the guarantor as may be required to be sold by auction for the recovery of debts and that such receiver may do such act.

9.         Physical facilities for special action on debt recovery:

In the current situation where the debts disbursed by the banks and financial institutions are to be recovered by taking possession of the borrowers' properties whether furnished as the security or not and by valuating the same, in pursuance of the judgments of the Tribunal is becoming more and more challenging and where the Act empowers the Debt Recovery Officer to detain the borrowers or guarantors, as per necessity, it is expedient to strengthen the Tribunal by equipping it with the required physical facilities in order to make the debt recovery efficient and effective.

10.        Human resource training:

In order to operate the business of the Tribunal in a smooth and efficient manner, its Members need to have study visits and employees need proper trainings. It is necessary that such trainings should be related with the modalities and modus operandi of finance agencies and judicial service.

11.        Provision of resources:

For the purpose of making the Tribunal more managed and effective, it needs, in addition to the existing means and resources currently at its disposal, five computers, two printers and UPS of good quality, one photocopy machine, one high capacity printer to print working manuals, progress reports and bench books, as well, one movie camera, two high quality tape recorders, one television set, one power point LCD projector.

The Tribunal is effortful to arrange for these resources. Moreover, a necessity is felt that there should be a provision of life insurance for the debt recovery team, a debt recovery allowance in a sum that is at least 50% of the salary being drawn by the staff of the Tribunal for the staff and a jeep or pick up van to be used in the debt recovery business. Similarly, since the Tribunal has felt the need of a suitable library, it is also effortful also to arrange for such library.

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

The establishment of this Tribunal is also linked with the finance sector reform program of the country. However, in spite of frequent efforts made by the Tribunal, it has not been able to have any kind of external assistance for its strengthening. So, there has not been developed a feeling that the debt recovery business being carried out by the Tribunal is also a part of the finance sector reform program.

In this regard, it is necessary that the activity of discharging justice by the Tribunal should be considered as an integral part of the bad debt recovery and the business of the Debt Recovery Tribunal should be made as a component of the finance sector reform program.

Part-3

Appendices 
Appendix-1

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

Financial Institutions

Out of the total number of 94 cases, in the case of banks accounting for 69.15%, 29.23 % has already been settled.

Out of the total number of 94 cases, in the case of financial institutions accounting for 30.85%, 37.93 % has already been settled.

Appendix-2

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

Appendix- 3

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

                                                                                                                                                 Rs.  in thousand "000"

Appendix – 4

Statements of budget received from His Majesty's Government and of expenditures

Fiscal year 2060/061(2003/04)

 A sum of Rs.1, 806,851.70 (received from case fees and other sources) has been paid to revenue in fiscal year 2060/061 (2003/04).
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