Bankers and their conflicts of interestThe central bank should be commended for its decision to enforce stricter controls.
Nepal Rastra Bank has been prominent in the news cycle in recent times. The central bank has yet to announce its monetary policy for 2019-20. Latest reports suggest that the policies won’t be announced until the second day of the new fiscal year, which has put the stock market in a fluster in recent days. Meanwhile, it has been featured for its non-monetary policy regulatory announcements. First came the announcement of plans to pressure banks to merge in order to create a lesser pool of more stable financial institutions in the country. This move has been controversial. Bankers and stakeholders agree that mergers and acquisitions are required, but they want Nepal Rastra Bank to focus on providing incentives to merge and to provide efficient monetary policy directives, rather than attempting to use tactics that go against open market principles. However, the central bank should be commended for its most recent announcement to finally enforce stricter controls so that bank directors do not have conflicts of interest.
The idea to enforce stricter regulations on bank promoters and directors came around six years ago, when Finance Minister Yuba Raj Khatiwada was governor of Nepal Rastra Bank. Back then, due to a rising tendency of banks consciously providing sub-prime loans and loans to individuals and businesses known to bank directors, Khatiwada had announced stricter controls in the banking management system. In fact, Khatiwada had promised to implement new regulations within three years. Now, three years since the end of the self-imposed deadline, the current governor is bringing the topic back into discussion. While it is not a monetary policy instrument, such a move is within the central bank's ambit, as it is also the regulatory agency charged with keeping the banking sector healthy and fair.
For years, the financial sector has been riddled with bad practices that have allowed directors and influential promoters from the banking sector to siphon depositors’ money into funding loans for businesses that they also control. Other cases of conflicts of interest, such as Gurkha Development Bank attempting to buy land owned by one of its own promoters, have also been prevalent. Nepal Rastra Bank’s attempts to curb such behaviour is, therefore, laudable. However, it remains to be seen whether the regulations will actually pan out, given how it took six years just to be brought back into the conversation.
Moreover, little is known of what these regulations will entail. Currently, there are provisions in place that do not allow promoters—thereby directors as well—to take loans from their own institutions. However, this has obviously not worked in eradicating these unethical practices, as promoters and directors have found loopholes to circumvent regulations. One idea being floated is to disallow business persons with a certain percentage, yet unknown, of controlling shares in a business from simultaneously holding directorial positions in banks. While this is a step in the right direction, the central bank must make sure to close the loopholes that may still be exploited. Bank directors may transfer conflicting business shares to their immediate and pliable family members, for instance. Nepal Rastra Bank must thoughtfully apply effective regulations while allowing democratic and free-market principles to thrive unencumbered.