Failure of Nepal Development Bank Ltd.

Topics: Bank, Fractional-reserve banking, Banking Pages: 7 (2164 words) Published: November 9, 2011
Chapter I
1. Background
1. 1. History
Nepal Development Bank Limited (NDBL) was established under the Company Act, 2053(1997) in Chaitra 6, 2054 (March 19, 1998). It was the first national level development bank established by the private sector in Nepal. It had commenced its operation since Magh 17, 2055(January 31, 1999) as per Development Bank Act, 2052 (1996). Since Baisakh 21, 2063(May 4, 2006), it had imparted its services in accordance with Bank and Financial Institution Act, 2063. It had entered into the subscription and services agreement with Industrial Development Bank of India Ltd. (IDBI), the most leading development bank of India on 7th July 2003. It had been honored with ADFIAP (Association of Development Financing Institution in Asia and the Pacific and foreign countries) Development Awards 2004 Infrastructure Development Category for its significant contribution towards infrastructure development in the country. The main objective of NDBL was to cater the demand of medium and long term finance for the industrial, commercial, agricultural, tourism, infrastructure sectors and other services by offering various banking facilities. It mobilized its sources in the form of fixed, saving and other short-term deposits with competitive interest rates.

1.2. Bank Failure:
Bank (depository institutions) failures are widely perceived to have greater adverse effects on the economy and thus are considered more important than the failure of other types of business firms. In part, bank failures are viewed to be more damaging than other failures because of a fear that they may spread in domino fashion throughout the banking system, felling solvent as well as insolvent banks. Thus, the failure of an individual bank introduces the possibility of system wide failures. This perception is widespread. It appears to exist in almost every country at almost every point in time regardless of the existing economic or political structure. As a result, bank failures have been and continue to be a major public policy concern in all countries and a major reason that banks are regulated more rigorously than other firms. A bank fails economically when the market value of its assets declines below the market value of its liabilities, so that the market value of its capital (net worth) becomes negative. At such times, the bank cannot expect to pay all of its depositors in full and on time. The bank, or indeed any firm, should be resolved as quickly as possible in order to treat all depositors (creditors) fairly and not allow a run by depositors holding demand and short-dated deposits. The longer an insolvent bank is permitted to operate, the more time such informed depositors have to withdraw their funds at par value and effectively strip the bank of its valuable assets. The entire loss will then be borne by less informed depositors and holders of longer-dated deposits. Moreover, because banks are closely intertwined financially with each other through lending to and borrowing from each other, holding deposit balances with each other, and the payments clearing system, a failure of any one bank is believed to be more likely to spill over to other banks and to do so more quickly. Thus, the banking system is seen as more susceptible to systemic risk, because there is probability that cumulative losses will occur from an event that ignites a series of successive losses along a chain of institutions or markets comprising a system.

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1.3. Objective of the study:
The main objectives of our study are:
* To identify the causes of failure of Nepal Development Bank Limited * To study the impact of its failure on different stakeholders and depositors * To study the impact of its failure in the financial system * To identify different measures to be taken by Central Bank and other BFIs to avoid similar failure. * To develop the critical and conceptual skills

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