Banks may be required to set up stabilisation fundThe bill to amend the Bank and Financial Institution Act also proposes to set a two-term limit for board members.
A bill to amend the Bank and Financial Institution Act 2017 tabled in Parliament on Wednesday contains a provision requiring banks to maintain a financial stabilisation fund that they can dip into during times of financial crisis.
The fund can be utilised if any bank and financial institution gets into a financial crisis that is likely to affect the entire financial sector.
According to Nepal Rastra Bank officials, the central bank inserted the provision to prevent banks from going into liquidation. “Apart from maintaining the other funds in the existing law, banks will have to set aside money to deal with potential crises if the bill is signed into law,” said an anonymous source.
Currently, banks fall back on the reserve maintained in the capital adequacy ratio, general reserve and equaliser fund to manage operational risks. No separate provision exists to address a financial crisis.
Bhuwan Dahal, chief executive officer of Sanima Bank, said banks had been utilising the equaliser fund to address exchange rate fluctuations.
According to him, banks use the capital adequacy ratio and general reserve to meet liabilities and other risks such as credit risk and operational risk.
The bill to amend the Bank and Financial Institution Act also proposes to set a two-term limit for the board of directors of banks and financial institutions. Similarly, banks will have to obtain permission from Nepal Rastra Bank to hire or fire their chief executive officers.
According to bankers, the government has introduced the provision in a bid to maintain healthy practices in the banking business. “In many cases, board members have been found to be pressuring the chief executives to issue loans in prescribed areas or to fulfill their own vested interests,” said a former banker who didn't want to be named.
The bill to amend the act has also fixed the eligibility criteria for candidates to get appointed to the board of banks and financial institutions.
According to the proposed stipulation, a prospective board director must have a bachelor's degree in a related subject, work experience of five years in the position of at least a director in any bank or an officer in the government.
Similarly, the bill has also set the upper age limit for board directors at 65 years and the minimum age limit at 25 years. There is currently no maximum or minimum age limit for board members of banks and financial institutions.
According to the bill, the money in bank accounts that remain inactive for 20 years will be turned over to the government. Currently, the money in dormant accounts is transferred to Nepal Rastra Bank's banking development fund.