By Pramod Prasad Nepal,
Corporate governance is a key element in improving economic efficiency,
which involves
a set of relationships between a company’s management,
its board, its shareholders and other stakeholders. It also provides
the structure through which the objectives
of the company are set and
the means of attaining those objectives and monitoring performance
are determined. The recent financial crisis in Asia and elsewhere
also have
made amply
clear to all
about the importance
of the issues of transparency
and accountability in corporate governance to investor confidence
and to
overall national economic performance.
Concept
Organization
for Economic Co-Operation
And Development (OECD), an international organization, whose main motto is ‘partnerships
for progress’
has developed non-binding principles of corporate governance standards
and guidelines, which cover five areas. According to the standards and guidelines the corporate governance framework
should protect shareholders’ right, should ensure the equitable treatment of all shareholders including
minority and foreign shareholders. All shareholders should have
the opportunity to obtain effective redress for violation
of their rights.
Good corporate governance is
not an old concept for the Nepalese financial system. Prior to the
open licensing system for the establishment
of Bank and Financial Institution, authorities were not found so concerned
about good governance
of financial institutions.
The reason might be the presence of only two commercial banks fully and partially owned by the Government. The absence or the denial of good governance led two old public sector commercial banks Rashtriya Banijya Bank and Nepal Bank Limited towards serious shortfall in all aspects of their governance. As soon as the new private and joint venture commercial banks and other financial institutions started their establishment in Nepal, the concerned Nepalese authorities started thinking seriously about the necessity of good corporate governance.
Due to lack of accountability, lack of experience as well as expertise and the practice to use the facility in one’s own interest it was observed that some of the banks and financial institutions were not following the principle of good corporate governance. Such practice seriously affected their profitability resulting in piling up of the non-performing assets. Then the necessity of having a specific law and relevant prudential norms were badly felt. Nepal Rastra Bank as a custodian to Nepalese financial system came forward and started issuing relevant prudential regulations, which was the demand of the hour. Issuance of such regulations had been welcomed as a step towards restoring good governance in the banks and financial institutions. Regulation was aimed at helping them to enhance their deteriorated good governance conditions, which was thought as the root cause of non-performance. Main focus of the regulation was given on putting restrictions on defaulters from enjoying more credit facility because they were said to have found enjoying credit facility from different banks and financial institutions in spite of their failure to repay the loan of other banks and financial institutions. Provision were even made in the regulation issued by Nepal Rastra Bank to blacklist the defaulters and their family members.
Regulation alone is not sufficient enough to regulate the bank and financial institution efficiently and effectively. Instead of having a separate law for each and every Bank and Financial Institution, Nepal Rastra Bank initiated an umbrella act for all commercial banks and financial institutions for their smooth functioning and to minimize the risk. Provisions regarding classification of banks and financial institutions, promotion from lower grade to upper grade, demotion from upper grade to lower one and specific qualification for the appointment of board of directors as well as chief executive officer and their accountability, liability and right and duties have been clearly specified in the new Ordinance, 2061 Relating to Bank and Financial Institution.
The effort of bringing an umbrella law, in this regard, is really praiseworthy. But certain provisions of the law have been seen as controversial. Inclusion of the article regarding minimum qualification for the appointment of the 2/3 of the board of directors in ordinance 2060 and for the appointment of all the directors from among the promoters of A, B and C class licensed institution in ordinance 2061 as graduation with rigid specific qualification has created lots of controversy and dissatisfaction among the investors.
Likewise the specific qualification and the experience for the Chief Executive in the Ordinance, 2061 has also been seen as an intervention in the independency of bank and financial institution. To be a CEO of a bank or financial institution, according to the present law, a person should have at least a Bachelor’s degree and a minimum working experience in executive level for five years in HMG or banking institution or financial institution or international financial institution, except the board of directors from among the public shareholders. Lawmakers must think that imposition of such specific experience may restrict well-experienced and deserving persons with the experience in the level other than that mentioned in the law. Such a provision also may put restriction on people having good managerial skill, experience, interest and accountability, from entering into banking or financial business.
Furthermore, the provision regarding the appointment of professionals from among the list of the experts published by Nepal Rastra Bank has no meaning now because the recent conditions (qualification and experience) put in the law for the appointment of the board of directors from among promoter shareholders are very rigid.
Need
It has been proved from the various instances that to run a bank or financial institution effectively and efficiently good governance is the foremost condition. It has also been proved that good governance is not merely the result of legal provisioning but the result of the feeling of accountability and responsibility by Board of Directors, CEO and other officials from the core of their heart. So the need of the hour for the bank or financial institution is to work towards ensuring good governance, which is the only way to success. | 
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