The arrest of Nepal Investment Mega Bank (NIMB) Chief Executive Officer Jyoti Prakash Pandey has triggered a debate over a fundamental question in Nepal’s financial system: when a company collapses and the government steps in, who has the first right over pledged assets: the state or the lending bank?
The dispute emerged after the Central Investigation Bureau (CIB) of Nepal Police arrested Pandey on Tuesday on allegations that NIMB illegally auctioned assets pledged by Smart Telecom with the intention of depriving the government of its claim. The bank, however, has insisted that it merely exercised its legal right to recover loans backed by collateral.
The Nepal Telecommunications Authority (NTA) revoked Smart Telecom’s licence in April 2023 after it failed to pay renewal fees and other dues reportedly amounting to nearly Rs 20 billion. Before its collapse, Smart Telecom had borrowed around Rs 5.2 billion from a consortium led by NIMB and including Prime Commercial Bank. The financing was extended through letters of credit, overdrafts, and various long- and short-term loans. Smart Telecom had pledged its network infrastructure, machinery, and telecommunications equipment as collateral for the loans.
According to the bank, it initiated recovery proceedings when the company defaulted on repayments. In September last year, the bank published a public notice announcing the auction of Smart Telecom’s pledged assets. Ncell Axiata eventually won the auction with a bid of Rs 4.6 billion.
The bank has argued that the auction was conducted fully within the framework of Nepal’s banking and secured transaction laws. NIMB has primarily relied on Section 57 of the Banks and Financial Institutions Act (BAFIA), 2017, which allows banks to auction collateral if borrowers fail to repay loans or violate loan agreements. The provision grants banks broad powers to recover principal and interest “notwithstanding anything contained in the prevailing Nepal law.”
It has also cited the Secured Transactions Act, 2006, under which the collateral had already been registered with the Secured Transactions Registry Office years before Smart Telecom’s licence cancellation. Section 28 of the Act gives priority to security interests according to the order of registration, while Section 46 authorizes secured creditors to sell or dispose of collateral in case of default.
NTA officials say the authority was still conducting valuation and liability assessments when the bank auctioned the equipment. According to the regulator, the sale occurred without coordination or approval from the authority, even though the company was already under regulatory management.
From the bank’s perspective, however, the issue is straightforward: the loans were backed by legally registered collateral, the borrower defaulted, repeated notices were issued, and the pledged assets were auctioned in accordance with banking laws.
Financial sector experts say this principle is central to the functioning of the banking system itself. Unlike ordinary businesses, banks primarily operate using public deposits. The money they lend does not belong to promoters or executives alone; it belongs largely to depositors. As a result, recovering bad loans is not merely a commercial decision but also part of a bank’s responsibility.
They say if banks are unable to enforce collateral rights, financial institutions would become more reluctant to lend to large infrastructure or corporate projects if the enforceability of collateral becomes uncertain after government intervention or regulatory action. Further, they say weakening banks’ recovery rights could ultimately threaten depositors’ money parked in banks and increase systemic financial risks.
Past Supreme Court verdicts have also set a precedent that a second charge cannot be created if the bank has first charge on the security. The apex court issued the verdicts in cases filed against different banks by government agencies like the Land Revenue Office and Revenue Investigation Department.
The case is therefore likely to become a landmark test of how the government balances two competing priorities: protecting public revenue and safeguarding public deposits held in banks.
Whatever the court eventually decides, the outcome could shape future lending to highly regulated sectors such as telecommunications, aviation, hydropower, and infrastructure, where large corporate borrowing often depends heavily on the legal certainty of collateral recovery.
