Nepal Rastra Bank decided to liquidate Samjhana Finance a few months ago. It declared Gurkha Development Bank a troubled institution a month ago and made public huge irregularities by the former executive chairman of Nepal Share Market Finance a couple of months ago. Such disclosures have shaken the financial system to the core and sharply eroded public confidence. Milan Mani Sharma of Republica talked to Governor of Nepal Rastra Bank (NRB) Dr Yuba Raj Khatiwada on the problems seen in the sector and steps NRB is taking to tackle them.
More banks and financial institutions have been found to have problems in recent months. What is the reason behind this?
Problems at BFIs have largely to do with poor corporate governance. And I must admit, NRB´s supervision has been too weak in the past to track irregularities on time. For example, we found the problems only in 2010, whereas if NRB had carried out on-site inspections, it would have known a year earlier. This would have given us time to correct operations. However, the late information forced us to decide on liquidation.
What are you doing to tackle this weakness?
Our inability to conduct frequent onsite inspections is due to inadequate manpower. NRB had not even recruited five staffers for the supervision department even as it added 35 financial institutions in a single year. To address this constraint, we are recruiting 25 officers, 50 assistants and a few chartered accountants. We are also developing a supervision manual to ensure uniformity in inspection and the post-inspection responses by NRB. We are also mulling over splitting the Financial Supervision Department to separately supervise 88 development banks and 89 finance companies.
Latest unfolding developments also suggest that NRB has failed to identify and nip anomalies in the bud. This raises questions about NRB staff as well. What is NRB doing to make its staff accountable?
We could not hold a particular staffer responsible because inspection staff are frequently rotated and there was no specific desk for a particular group of institutions. We have now established particular desks to monitor particular groups. This will help us identify lapses among our staff. I believe this initiative will make staffers more accountable for their action
What is the status of compliance with NRB directives?
A few banks are acting slowly to comply. We are keeping a close eye on them. There is no alternative for BFIs but to comply with NRB directives.
Frequent news reports about the problems of BFIs are leaving the general public confused over the health of financial institutions. How would you explain to them the overall outlook of the sector?
The overall health of the system is sound. All financial indicators like capital adequacy, liquidity and credit-deposit ratio at BFIs are sound. The problems seen in a few institutions are exceptions and their failure is largely related to unlawful activities by board directors and chief executives. As governor I assure the public that their savings with BFIs are safe. The only thing I want to request here is: do not run after unnaturally high interest returns.
What are the challenges that NRB is facing while ensuring good governance at BFIs?
The foremost challenge is that NRB has not succeeded so far in punishing errant promoters and executives who damaged the financial health of the BFIs and exposed the public´s deposits to risk. Our focus rested mainly on correcting foul play and restorring the financial health of troubled banks. This approach has not contributed to positive transformation in the behavior of errant bankers and promoters. Hence, we have decided to change our priority. Now we will first bring the axe down on wrongdoers and then move on to force corrections in BFIs operations.
NRB has retained a provision on forceful mergers in the new merger by-law despite committing itself earlier on to removing it. Why?
A merger basically is a decision that the players themselves decide on after considering the market and their own individual positions. However, we have promoters who are neither ready to improve the financials of their institutions nor willing to merge the institutions. Apart from that, we have a case wherein the same business group promotes banks and also other financial institutions. So the obvious question here is: Why does a business group prefer to hold all these institutions instead of consolidating them into a strong institution? Basically, we assessed that the provision was necessary for fair interventions in the market.
More BFIs are appointing former NRB staffers to key positions. How do you evaluate this trend?
I think the reason behind BFIs hiring more ex-NRB staffers is they are well versed in prudential directives and aware how the central bank responds to different issues. This eases BFI operations greatly. But what is also true is NRB never gives special consideration to BFI officials just because they once worked at NRB. Instead, every proposal they bring raises our alertness level and our staff become extra-cautious to make sure they do not get what the central bank does not pledge to other BFIs.