Banks may need central bank’s nod to pick CEOThe government is mulling to introduce a new law which will require banks and financial institutions to get approval from Nepal Rastra Bank before appointing their chief executive officers.
The government is mulling to introduce a new law which will require banks and financial institutions to get approval from Nepal Rastra Bank before appointing their chief executive officers.
The country’s central bank is in the process of amending the Banks and Financial Institutions Act by inserting a provision which will require the board of directors of banks and financial institutions to get its go-ahead before naming the chief. A highly placed source at Nepal Rastra Bank confirmed to the Post that it was considering including the provision in the existing act.
“We are including the provision in a bid to instil a culture of corporate governance in banks and financial institutions,” said the source. “The banking industry is completely different from other businesses as a large chunk of the funds used by banks comes from ordinary depositors, and they should be protected. Therefore, the CEO who is managing the bank should not only be responsible to the board of directors but also to the ordinary depositors who park their hard earned income in the bank.”
The reason behind creating the new law is to make sure that the person heading a bank or financial institution is equally responsible towards its depositors, the source added. Bank promoters are not happy with the regulatory body’s plan as they fear that the new provision will allow it to micro manage banks and financial institutions.
“The Banks and Financial Institutions Act already has a set of criteria that needs to be fulfilled before appointing the CEO of banks and financial institutions, so there is no need to bring another provision requiring them to get the central bank’s go-ahead to pick the chief,” said Chandra Prasad Dhakal, chairman of Global IME Bank.
“If the central bank wants very competent and responsible persons to head the management of banks and financial institutions, it can make those criteria more stringent.”
Experts gave the benefit of the doubt to the central bank saying that the new law will instil a culture of corporate governance in the banking industry.
“It seems like Nepal Rastra Bank wants banks and financial institutions to hire CEOs who are responsible enough to protect the interest of minority shareholders and depositors,” said Sanjib Subba, CEO of the National Banking Institute, a national level apex banking academy.
A former banker told the Post that the new law being introduced by the central bank was essential to stop the practice among promoters of hiring their yes-man as the CEO. “The yes-man, naturally, will be accountable to the promoter shareholders only instead of the depositors and minority shareholders,” said the banker who asked not to be named. “The central bank’s new rule will help to put a more responsible person at the helm of the bank or financial institution.”
National Banking Institute CEO Subba said the new provision requiring banks to get the regulator’s okay to name the CEO is not enough to instil a culture of good governance in the banking industry. In fact, the central bank should come up with measures where banks have a professional board of directors.
“While amending the act, Nepal Rastra Bank should make sure it includes provisions which will open ways to form a professional board in the bank. If banks and financial institutions are led by a professional board, it will be an amicable way to protect the interest of minority shareholders and depositors,” said Subba.