Though Himalayan Bank (HBL) and Bank of Kathmandu (BOK) have moved the court to withhold making payments to Melamchi Water Supply Development Board (MWSDB), there is a high chance that the banks might have to provision the due amount. This is expected to affect dividend distribution plans of the two banks.
The two Nepali banks stand to lose about Rs 1.5 billion to pay as counter guarantee amount to MWSDB after their client — China Railway 15 Bureau Group Corporation — failed to complete the construction of the tunnel.
Back in September 2012, the Melamchi project terminated the contract with contractor — China Railway 15 Bureau Group Corporation — to dig a 26.3-km tunnel as the contractor sought more outlay than it had agreed upon in its bid document.
Due to the failure of the Chinese contractor in completing the tunnel, the employer — MWSDB — demanded that Himalayan Bank and Bank of Kathmandu that have undertaken counter guarantee on behalf of China Construction Bank to pay the guarantee amount. Meanwhile, the Chinese contractor has lodged a case against MWSDB for cancelling the contract at a Chinese court. This barred China Construction Bank to make payments for bank guarantee to the Melamchi project until the final verdict on the case is made by the court.
“Since MWSDB has been asking for payments, we have filed a case at Kathmandu District Court requesting it to allow the banks to withhold the counter guarantee payment to the project till the final verdict is made by the Chinese court, in the case against MWSDB and the Chinese contractor,” said CEO of Himalayan Bank Ashoke Rana.
Himalayan Bank stands to lose $6.2 million for guarantee made for the contractor’s performance bond and Bank of Kathmandu which had issued advance payment guarantee stands to lose $6.62 million and 1.4 million euros. Performance bond and advance payment guarantee are issued by the contractors to ensure that the project is completed on time and the employer can confiscate the guaranteed amount in case of failure.
“The guarantee agreement between the parties is governed by the International Chamber of Commerce Uniform Rules
for Demand Guarantee clause 458 that states the contractor cannot dictate to the bank whether to pay in compliance of the guarantee to the employer,” pointed out Rana. “However, the Chinese contractor has moved the court so we have no choice but to wait for the hearing,” he said. The next hearing date has been fixed for December 18.
Meanwhile, investors who are hoping for dividend announcement are growing wary. If Nepal Rastra Bank (NRB) asks the banks to set aside the amount to be paid as provisioning, the profit
of these two banks will decline drastically. “It is NRB’s call. If it directs to provision the guaranteed amount then we have to,” said Rana.
According to a NRB source, the banks most probably will have to provision the amount because there is a high chance that the court might ask the banks to furnish MWSDB the amount.
“Investors who are expecting dividends have already started selling their shares — especially of Bank of Kathmandu,” said president of Nepal Investors’ Forum Raj Kumar Timilsina.
“These shares could have been traded at a higher price but the uncertainty regarding the provision affected the price since the last half year,” he said.
HBL had earned Rs 1.02 billion last fiscal year. However, greater strain will be on BoK that earned Rs 617 million last fiscal year, as the provisioning will be greater than its profit.
source: the himalayan times, 11 Sep 2013
The two Nepali banks stand to lose about Rs 1.5 billion to pay as counter guarantee amount to MWSDB after their client — China Railway 15 Bureau Group Corporation — failed to complete the construction of the tunnel.
Back in September 2012, the Melamchi project terminated the contract with contractor — China Railway 15 Bureau Group Corporation — to dig a 26.3-km tunnel as the contractor sought more outlay than it had agreed upon in its bid document.
Due to the failure of the Chinese contractor in completing the tunnel, the employer — MWSDB — demanded that Himalayan Bank and Bank of Kathmandu that have undertaken counter guarantee on behalf of China Construction Bank to pay the guarantee amount. Meanwhile, the Chinese contractor has lodged a case against MWSDB for cancelling the contract at a Chinese court. This barred China Construction Bank to make payments for bank guarantee to the Melamchi project until the final verdict on the case is made by the court.
“Since MWSDB has been asking for payments, we have filed a case at Kathmandu District Court requesting it to allow the banks to withhold the counter guarantee payment to the project till the final verdict is made by the Chinese court, in the case against MWSDB and the Chinese contractor,” said CEO of Himalayan Bank Ashoke Rana.
Himalayan Bank stands to lose $6.2 million for guarantee made for the contractor’s performance bond and Bank of Kathmandu which had issued advance payment guarantee stands to lose $6.62 million and 1.4 million euros. Performance bond and advance payment guarantee are issued by the contractors to ensure that the project is completed on time and the employer can confiscate the guaranteed amount in case of failure.
“The guarantee agreement between the parties is governed by the International Chamber of Commerce Uniform Rules
for Demand Guarantee clause 458 that states the contractor cannot dictate to the bank whether to pay in compliance of the guarantee to the employer,” pointed out Rana. “However, the Chinese contractor has moved the court so we have no choice but to wait for the hearing,” he said. The next hearing date has been fixed for December 18.
Meanwhile, investors who are hoping for dividend announcement are growing wary. If Nepal Rastra Bank (NRB) asks the banks to set aside the amount to be paid as provisioning, the profit
of these two banks will decline drastically. “It is NRB’s call. If it directs to provision the guaranteed amount then we have to,” said Rana.
According to a NRB source, the banks most probably will have to provision the amount because there is a high chance that the court might ask the banks to furnish MWSDB the amount.
“Investors who are expecting dividends have already started selling their shares — especially of Bank of Kathmandu,” said president of Nepal Investors’ Forum Raj Kumar Timilsina.
“These shares could have been traded at a higher price but the uncertainty regarding the provision affected the price since the last half year,” he said.
HBL had earned Rs 1.02 billion last fiscal year. However, greater strain will be on BoK that earned Rs 617 million last fiscal year, as the provisioning will be greater than its profit.
source: the himalayan times, 11 Sep 2013
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