The role of money in politics has become increasingly importantAs the bill on Banks and Financial Institutions Act (Bafia) awaits endorsement by Parliament, questions have been raised over its significance after key provisions included in the initial draft to ensure good corporate governance were removed
As the bill on Banks and Financial Institutions Act (Bafia) awaits endorsement by Parliament, questions have been raised over its significance after key provisions included in the initial draft to ensure good corporate governance were removed, apparently under the influence of lawmakers who are also bank promoters. Some former governors and senior officials of Nepal Rastra Bank (NRB) have labelled the amended bill “regressive”. Mukul Humagain and Prithvi Man Shrestha spoke to former NRB Governor Dipendra Bahadur Kshetry about the genesis of the proposed legislation, the impact of the amended act on the financial sector, the state of financial discipline in the country, and monetary policy that the central bank needs to adopt in the light of the recently presented budget.
The decision of NRB to send the problematic Nepal Development Bank to liquidation during your tenure as central bank Governor had brought to surface the problem of embezzling public funds by bank promoters. What was the genesis of the problem?
Promoters of banks and financial institutions seemed to lack knowledge of the difference between financial institutions and other businesses. They argued that since they were the investors, they should be in control of the institutions. And they were using the institutions’ resources for personal purposes, which was against the law. So we took action against some financial institutions that were flagrantly violating the law. Not doing so would have been an injustice to the depositors.
The action against Nepal Development Bank also had symbolic significance. Even in some commercial banks, there were conflicts between promoters, shareholders, board of directors and the CEO. If the central bank had not taken a step at that point, the situation would probably have worsened.
Let me give you an example of Bank of Kathmandu where such a conflict of interest existed. We asked it to do a due diligence audit (DDA) and took control of its management. Within three months of the central bank’s takeover, we were successful in completely changing the board and handing over the bank back to the elected board.
These events showed that the central bank’s circular may not be sufficient to regulate the financial institutions if the promoters are not kept in check. Such a situation necessitated the new act to bring these institutions under the purview of the law.
It took a long time to introduce Bafia. When the bill was tabled in Parliament, attempts were made to water it down by removing provisions aimed at ensuring sound corporate governance. What impact will this have on the financial sector?
The law was proposed to create a healthy financial sector. The original bill had intended to restrict the tenure of the board of directors and the CEO to two terms. That would have enabled a financial institution to mend its ways in case it was heading in the wrong direction.
However, the chair and board of directors, who are also lawmakers, exercised excessive influence over a subcommittee [of a parliamentary committee] to ensure that the amended bill would be passed. If the bill is passed in its amended version, it would allow them to exercise undue authority over issuing and recovering loans. We took the issue to the subcommittee’s coordinator Dipak Kuinkel and conveyed him that the amendment would dilute the law. He gave a spineless response that they had only two choices in front of them: to either enact Bafia or dishonour their amendment proposal; that it was better to enact Bafia now with the possibility of amending it later, instead of withdrawing it altogether.
This demonstrates that Parliament lacks the power to control banks and financial institutions, and it has created a situation where a CEO, no matter how conscientious he is, has to surrender his authority to the promoters. This means that the decision about providing loans and recovering them goes to the hands of promoters instead of CEOs. So what has happened is wrong and this has the potential to wreck the entire banking and financial sector.
Why is a term limit for a CEO or the board of directors necessary at all?
The chances of stagnation increase if the same person remains in one position for an extended period. Irregularities are likely to creep in. It also prevents new people from gaining valuable experience. There is also the chance that those prolonging their stay in the same position could take advantage of their position and hide wrongdoings.
How would you describe the amended bill?
The bill reaching Parliament for endorsement after almost 10 years is a positive step. Now there will be one comprehensive act to oversee the banking and financial sector. However, the severely diluted form means that it could end up having more of a negative impact in the long run. It undermines the authority of the central bank and gives undue power to the promoters of banking and financial institutions.
What is your take on the way the subcommittee for making a decision on the bill was formed?
In a democracy, it would be difficult to call the process itself wrong. But the committee should have consisted of people with relevant knowledge and experience in the banking sector. However, what was wrong was that those who wanted the law to be formulated in a particular manner became part of the committee. From an ethical point of view, they should have acknowledged the inherent conflict of interest and stepped down.
Among the various regulators in the country, the central bank is considered the most effective. Now the new Bafia bill, if endorsed by Parliament, seems to weaken the authority of the central bank. What impact is it likely to have on other regulators?
The lawmakers’ ability to influence the parliamentary committee will send a signal as to who the real bosses of the country’s banking sector are. Their success in passing the amended bill will pose a direct threat to the authority and power of the NRB. That will make it difficult for the NRB Governor to take bold steps in accordance with the law. If the central bank itself is weak, one can easily see the kind of negative impact this is likely to have on new laws on other sectors like cooperative and insurance that are also in the works.
Overall, how would rate the integrity of the promoters, board of directors or CEOs in the financial sector?
Established banks do care about their reputation. If the central bank points out even a minor flaw, their international standing can take a beating. So they appear to take financial discipline seriously. But the newly established ones appear far less so. As such, the greater the effort the central bank puts in monitoring financial institutions, the more it will contribute to financial discipline.
How responsible is the country’s political transition for the current trend of formulating laws with a commercial interest in mind?
Ethics in politics has been seriously weakened. The role of money in politics has become increasingly important. This creates an environment in which corruption flourishes and undermines national interest. People from all sectors should aggressively wage a fight against such trends and tendencies.
Going back to Bafia, what in your view is the right way ahead?
Banks and financial institutions and those concerned about the sector have spoken strongly against it. The media have covered the issue widely. I am hopeful that the sovereign Parliament will respect public opinion and negate the recommendations made by the subcommittee; in other words, it will establish the provisions envisioned in the original ordinance.
While we talk about financial discipline in the banking sector, how justified is the claim that the government has presented an expansionary budget? What should be the direction of the monetary policy now?
The monetary policy should facilitate investment. In order for that to happen, money supply should be liberal. But that will be difficult for the economy to handle. The finance minister’s statement that it is the central bank’s job to control inflation is only half-true. The central bank does have control over money supply, but not over the supply of goods and services. After all, the money in the economy is used for the purchase of goods and services. If there is plenty of money but not enough goods and services, it will lead to inflation. If the government and the central bank do not coordinate well, a disaster in the form of double-digit inflation may ensue.