Efforts of Nepal Rastra Bank towards

Efforts of

Nepal Rastra Bank

towards Ensuring

Good Governance

-Pramod Prasad Nepal*

1. Before counting efforts that Nepal Rastra Bank has made to ensure good governance in banks and financial Institutions it is very much relevant to know what actually good governance is.

2. The meaning of good governance may not be the same for everybody. It may vary person to person. But in my opinion Rule of Law, Fairness and Accountability are the main components of good governance.

3. Good corporate governance is a key to the success of a bank and financial institution. Banks and financial institutions are a critical component of any economy. They provide financing for commercial enterprises, basic financial services to a broad segment of the population and access to payment system. In addition, some banks and financial institutions are expected to make credit and liquidity available in difficult market conditions. The importance of banks to national economies is underscored by the fact that banking is virtually a regulated industry and that banks have access to government safety nets. It is of crucial importance therefore that banks have strong corporate governance otherwise failure of Banks and financial institutions is inevitable.

4. It has been proved from various studies that Asian financial crisis was the result of the failure of many banks due to lack of sound risk control and clear strategy, that means there was a serious lack of good corporate governance. Although there was no such instance of crisis in Nepal, taking the cause of crisis into account measures have had been gradually taken to enhance level of good governance in bank and financial institution. The necessity of good governance might not have been felt earlier by the central bank because of the fewer number of banks and financial institutions among which most of them were very new.

5. Issuance of prudential regulation to bank and financial institution by Nepal Rastra Bank, enactment of new Nepal Rastra Bank act, 2058 and issuance of Bank and Financial Institution Related Act, 2063, are the measure steps, which have been taken so far to ensure good corporate governance in bank and financial institution.

6. Nepal Rastra Bank have been playing vital role in ensuring good governance in bank and financial institution. One of the main objectives of Nepal Rastra Bank as mentioned in Nepal Rastra Bank act is to appropriately regulate; inspect and supervise in order to maintain stability and healthy development of banking and financial system. This objective aims at ensuring good corporate governance. To meet above objective several provisions have been incorporated in both Nepal Rastra Bank act, 2058 and Bank and Financial Institution Related Act, 2063. Those provisions have not only empowered Nepal Rastra Bank to regulate; inspect and supervise bank and financial institution but have also endowed it with power even to impose one or more than one punishments on those bank and financial institution that violates an order or directives issued by it. Punishments incorporated in law are as follows:

(a) Could issue reprimand or written warning,

(b) Could obtain an undertaking from board of directors for adopting reformative measures,

(c) Could issue written order to end up frequent violation, abstain from such violation and adopt reformative measures,

(d) Could suspend or terminate the services of the bank and financial institution,

(e) Could prohibit commercial bank or financial institution to distribute dividend to its shareholders,

(f) Could prohibit commercial bank or financial institution from accepting deposits or granting loans and advances,

(g) Could impose full or partial restriction on the business transaction of the commercial bank or financial institution,

(h) Could suspend or revoke license of the commercial bank or financial institution.

7. To enhance good governance condition of bank and financial institution apart from the traditional power of licensing, regulation and supervision, Bank and Financial Institution Related Ordinance, 2061 has empowered Nepal Rastra Bank with lots of powers. Appointment of one of the Board of Directors from among qualified and well experienced business experts, promotion i.e. from ‘Ga to Kha’ or ‘Kha to Ka’ and demotion i.e. from ‘Ka to Kha’or ‘Kha to Ga’ of Bank and Financial Institution from one category to another, suspension and revoking of license, enlisting of auditors, suspension and taking over of the management, imposition of penalty fromRs.10 thousands to Rs.50 thousands according to the classification (for failing to furnish the specified information in time) and punishment to concerned authority( who does not comply with the orders and directives of Nepal Rastra Bank and acts against the interest of depositors and shareholders ) by Nepal Rastra Bank could be seen in this regard.

8. Nepal Rastra Bank has been carrying its responsibility to establish good governance through the issuance of necessary regulations since long time back. Regulations have been changed time and again. Separate regulations have been issued for different bank and financial institutions. Regulation covers almost all areas of activities of banks and financial institutions. It has been helping to bring their activities into right track.

9. In my opinion only enactment of any act or regulation is not sufficient enough. Compliance to the law is very essential. It would be of no use unless the concerned authority would go by it. To ensure whether banks or financial institutions are performing their business as per the law, timely supervision is the only option. Nepal Rastra Bank as per the law of the land is the supervisory body. It is the duty and responsibility of Nepal Rastra Bank by law to ensure whether banks and financial institutions are carrying their business as per the law. There is no doubt that Nepal Rastra Bank never lags behind in carrying its responsibility with full accountability, which has been proved time and again. But in spite of its regular inspection and supervision most of the banks and financial institutions have not been seen being able to ensure good corporate governance. Board of Directors of banks and financial institutions must be aware of the facts that their actions may have adverse effect on the profitability and ultimately take the institution towards non-performation or liquidation.

10. Despite full authority of taking necessary actions against those banks or financial institutions that do not comply with the provisions made in the law, amount of non- performing loans and non-banking assets have been increasing tremendously. Such increments have also been adversely affecting the overall business of the bank and financial institution. Such situation not only could be the result of, as it is blamed, ineffective and inefficient supervision by Nepal Rastra Bank but also could be the result of several other factors. Let whatever be the actual reasons but the blames of their failure have been put on the shoulder of Nepal Rastra Bank. So the role of Nepal Rastra Bank have now been very responsible and important especially at this juncture of time when amount of non-performing loans and liquid fund of bank and financial institutions are increasing and bank and financial institutions are struggling for their survival due to keen competition in attracting very small and feeble business sector and limited financial market in one hand and the adverse political situation, which is affecting particularly their recovery and Nepalese economy at large in other hand. The keen competition among the same business sector may lead them towards financial crisis and it is a hilarious task that Nepal Rastra Bank has to take as a challenge to lead them towards their prosperity pursuing them to follow the path of good governance.

11. In carrying its responsibility in ensuring good corporate governance Nepal Rastra Bank has to be very bold and perfect. For this purpose strong will, relevant prudential norms, experienced, educated, well-trained and well- motivated supervisory staff and feeling of accountability in top-level management are primary requirements. But in contrary to the above facts when Nepal Rastra Bank, to ensure good governance, is in need of efficient, trained and senior level staff and also in the process of re-engineering ‘Voluntary Retirement Scheme (VRS)’has been introduced suddenly targeting towards them too. As a result of which and rumors spread most of the competent staffs have been retired unwillingly that has created a vacuum which may affect efficient and effective supervisory responsibility of central bank at a time when it is trying to ensure good governance in banks and financial institutions. Such decisions have put question mark on staff management planning of Nepal Rastra Bank and on the implementation of the recommendation of re-engineering group that has been given contract from the loan of World Bank and are paid in U.S.Dollars.

12. It has been proved that good governance is the only one option to run an institution fairly and smoothly. Central bank has an important responsibility for shaping an effective regulatory framework that provides for sufficient flexibility to allow market to function effectively and to respond to expectations of shareholders and other stakeholders. So, unless and until there would not be timely, efficient and effective supervision followed by timely action against those who violates law, ensuring good governance in banks and financial institutions by just issuing order and directives would not be sufficient enough. So Nepal Rastra Bank should focus its efforts on strengthening and also moving relevant steps towards making itself able to carry on its regulatory and supervisory responsibility efficiently and effectively in the days to come so that banks and financial institutions would be in a position to do better and contribute a lot in enhancing country’s deteriorated economic condition.

Thank you.

*Advocate and Deputy Director N.R.B. (Retd.)