KATHMANDU, Dec 3: The government has summoned central bank and diplomatic channels to settle the dispute between two domestic banks and China Construction Bank after China´s second largest bank failed to honor international norms on payment of over Rs 1 billion to Nepali financial institutions.
Although it is not a normal practice for state authorities to intervene in matters involving banks, the government is keen on playing a mediatory role on the issue as it has questioned the trustworthiness and integrity of Chinese banks, which may hamper banking and ultimately trade and investment relations between the two countries, a source privy to the issue told Republica.
“The government has asked Nepal Rastra Bank to hold talks with its Chinese counterpart and has also summoned its embassy in China to look over the matter. It is making attempts to broker the talks mainly to ensure that such problems do not crop up in future,” the source said.
The government also feels it necessary to clear the air, as most of the contractors in sectors ranging from hydropower to telecom are Chinese, and this particular incident has raised many suspicions on them, the source said.
The dispute started after China Construction Bank refused to release US$6.2 million and 1.4 million euros to the Bank of Kathmandu, which had provided guarantee against advance payment made by the Nepal government to China Railway 15 Bureau Group Corporation, the contractor for Melamchi Water Supply Diversion Project, for the construction of 26.3km tunnel.
At the same time, the Chinese bank also refused to release $6.2 million to Himalayan Bank for guarantee provided against performance bond issued by the Melamchi project contractor.
The performance bond is usually issued by contractors in construction projects as a security against job completion, and it guarantees full payment to contract provider in case the contractor fails to complete the project. This is the same with advance payment guarantee provided by the Bank of Kathmandu.
Usually, these guarantees, issued by banks located in home country of the contractor, have to secure counter guarantee from banks located in the country where the contractor is working, as most of the contract providers fear financial losses in case the contractor flees.
As per this practice, the Chinese bank had appointed Himalayan Bank and the Bank of Kathmandu to offer counter guarantee to the Melamchi contractor.
Since both the Nepali banks were working on behalf of China Construction Bank -- which had originally issued the guarantee for the Chinese contractor´s project -- they were fully assured that the Chinese bank would extend compensation if the Chinese contractor failed to complete the project on time.
But after the Melamchi contractor was ousted by the Nepal government citing delay in completion of the work, it moved the Chinese court and came up with a stay order on the release of the guarantee amount. The Chinese bank also complied with the court order leaving Nepali banks helpless.
“This is a situation beyond our comprehension as such guarantees are unconditional,” Upendra Paudel, CEO of NMB Bank, told Republica, referring to provisions of the International Chambers of Commerce which make release of such cross-border payment mandatory for all banks.
Although Nepali banks are yet to release the amount to the contract provider, it is almost sure they will have to release the payment even if the Chinese contractor fails to release the guarantee amount. In such a case, the two banks would suffer huge losses.
“This incident has questioned the honesty and reliability of Chinese banks, which has compelled us to look at Chinese contractors with suspicion,” most of the bankers that Republica talked to said.
The two banks, in the meantime, are set to deploy Chinese lawyers to vacate the stay order.