Central bank plans stricter control of cooperatievsAllowing cooperatives and micro finance institutions (MFIs) to provide debit card and remittance transfer facilities will help to expand financial access
Allowing cooperatives and micro finance institutions (MFIs) to provide debit card and remittance transfer facilities will help to expand financial access, but they must first be brought under strong regulatory and supervisory parameters, Nepal Rastra Bank (NRB) said.
The budget statement for the current fiscal year and the central bank’s monetary policy have talked about establishing a separate regulatory body to regulate and supervise cooperatives and MFIs.
“If a situation is created where these institutions provide debit card and remittance transfer facilities to people of rural Nepal at their own locations, it will help to expand financial access,” said a concept paper on financial institutions outside NRB’s regulatory perimeter.
There are 13,313 savings and credit cooperatives and 15,000 non-governmental organizations (NGOs) involved in banking activities which are outside NRB’s purview. According to the central bank, there are a large number of savings and credit cooperatives and NGOs, and some of them have financial transactions on the level of institutions licensed by NRB, but their corporate governance is poor.
“The presence of such institutions has posed a challenge to the effective implementation of the monetary policy and the stability of the financial system,” NRB said.
According to the central bank, savings and credit cooperatives and NGOs conducting financial transactions are concentrated excessively in urban areas, they have invested heavily in real estate and other risky areas, they have not maintained effective management of assets and liabilities which has posed a risk to long-term liquidity and they have a low liquidity level.
Moreover, their credit-to-deposit ratio is high and the interest rates on deposits and loans are not maintained as per the regulator’s directive. Their credit-to-deposit ratio is 92.3 percent, which means they have little liquidity available, NRB said. “These factors could pose a risk to the savings of the general public.” Savings and credit cooperatives have 2.6 million depositors.
Considering this situation, the central bank has proposed establishing a second tier institution (STI) under it to regulate such institutions. It has proposed five steps to bring savings and credit cooperatives under the STI.
First, the number of savings and credit cooperatives in the country will be determined by asking them to register with the new regulatory body. Second, their applications will be reviewed to determine whether there is a financial risk based on their asset size, scope of service and number of members. Third, the central bank has suggested conducting on-site and off-site inspections before deciding to provide them a licence.
“The adequacy of their management system, policies and procedures, information system, internal control system, financial soundness and the quality of their loan portfolio should be examined,” NRB’s concept paper said.
Fourth, the central bank has suggested granting licences to cooperatives fulfilling the minimum standards with the provision that they report to the regulator regularly. Finally, if any cooperative wishing to obtain a permit from the new regulator fails to fulfil the required standard, it should be merged or liquidated, NRB said.