Nepal’s current framework for insolvency and bankruptcy are outdated and draconian. Under a bankruptcy, businesses are given little room to restructure. Debt recovery digs into the borrower’s personal credibility and unpledged property. The defaulter’s ability to bounce back is destroyed.
As we emerge from this crisis, many enterprises with weak underlying fundamentals will fail. They should be allowed to fail. Rather than short term relief which may artificially sustain them, an insolvency and bankruptcy protection framework would have allowed the enterprises to fail with dignity and provided the space to do something else.
This crisis is so serious that even enterprises with sound fundamentals will fail. Here again, an insolvency and bankruptcy protection framework, rather than short term relief, would have done better by providing them a mechanism to restructure their business and ride out the crisis.
Nepal (partly) open for business, Nepali Times
Short term relief measures are critical to this response. But we now have two choices: adapt and accept relief measures and move on, or accept the relief measures but force government to modernise its existing insolvency and bankruptcy protection framework.
There is already adequate understanding of modern insolvency and bankruptcy mechanisms in Nepal. Its importance and need, particularly in modernising our economy, is extensively acknowledged. Despite this, robust insolvency and bankruptcy protection to replace existing outdated financial regulations has never been brought forward. Nobody understands why, or where the resistance lies. But mysteriously, it never gets done.
All businesses should default on their loans until such time that government brings such a protection framework. It could be immediately approved as an executive order. Several Nepali financial experts working together could have it developed and ready for cabinet approval within a week. That would be about as much time as it took the Prime Minister to approve two extraordinary ordinances, get it endorsed by the President and have it rescinded.
The India-Nepal-China geopolitical tri-junction, Kunda Dixit
It is highly irresponsible to call on everyone to default on their loans. Mass defaults could trigger a larger financial crisis. But listen, a virus jumped out of a bat and infected a human. This has unleashed a pandemic, which has in turn spawned an economic crisis that is being compared to the Great Depression.
Millions of Nepalis are unemployed. Thousands of our workers are stranded abroad desperately awaiting safe passage home. Infections are still rising. And throughout this crisis, the highest authority of government, the Prime Minister and his ministers, are embroiled in a senseless power struggle.
What will you do this time? Will you rebuild and strengthen your house or prop it up with a wooden plank? Insolvency and bankruptcy reforms are only one example. Across sectors, we must not just try to adapt, but bring long-lasting change.