The World Bank's (WB) warning to pull out of the financial sector reform programme — if there is no 'satisfactory' improvement in NBL within one month — added more fuel to fire. Some experts claimed that the WB, the global lending institution, might suspend all its assistance to Nepal’s financial sector reform if its pre-conditions are not fulfilled. But WB has made it clear that following a six-month extension for ICCMT, the government is free to hire a professional management team, foreign or local, but with at least one expatriate as either CEO or chief credit manager. “A professional team should be selected on performance basis," says Tulsi Uprety, director of board at the Rastriya Banijya Bank (RBB).
Nepal started financial sector reform programme in 2002. The main objective of the programme is to develop a healthier financial sector, which intermediates funds more efficiently and effectively for the benefit of all the segments of the society and in a manner that supports private sector development, increased investment, and faster growth. The programme is not only related to NBL and RBB, but the broader aspect of it is also to reengineer NRB and make it more efficient in monitoring aspect.
Only a well-regulated financial sector can facilitate sustained economic growth, fostering a robust and vibrant financial market. Revamping research and financial monitoring strength and enhancing the capacity of NRB, the regulatory authority, to oversee an operated banking system are prime objectives of the series of reforms. And boosting a supervision capacity of NRB is one of the key agendas of the reform.
With the promulgation of the NRB Act 2002, one of the steps of the reforms programme, the central bank has now clearly defined responsibility, authority and accountability. As a result of the enactment of the new Act, supervisory, oversight, and regulatory functions have been strengthened substantially. NRB is now stricter than in the past in penalising the banks and financial institutions for non-compliance of regulations. The WB also supports NRB's strategic plan to enhance quality and frequency of inspections, both on-site and off-site, with timely reporting followed by the ability to take quick and corrective actions in case of non-compliance.
The central bank aims at boosting up the contribution of the financial system towards achieving the national goals of macroeconomic stability and financial discipline to a greater extent through increasing efficiency in mobilising and allocating financial resources, enhancing savings and investment levels, channelling the resources towards productive investments and allocating the available resources to the deficient segments of the economy for enhancing overall competitiveness.
The first phase of the reform programme has encouraged Voluntary Retirement Scheme (VRS) mainly to reduce the huge operating costs and make these troubled financial institutes saleable. NRB, NBL and RBB, they all have, to some extent, successfully completed the scheme.
In four phases, a total of 1690 RBB staff opted for VRS. In NBL a total of 2367 staff have opted for VRS. Similarly, out of RBB’s 114 branches, 71 branches are computerised. Also, out of 96 branches of NBL, 44 are already computerised and 38 are under the process.
If we go by the balance sheets of NBL and RBB, the performance of the new management has some good scores. But there are certain areas where they could have done better. However, NBL claims to have cut down the Non-Performing Assets (NPAs) to 15.20 per cent from 57 per cent when it took over the charge. Similarly, RBB claims to have reduced its NPAs to 32 per cent from 72 per cent in July 2003. “And within the last five-year’s period, it has registered less than one per cent NPA only,” says Janardan Acharya, acting CEO of RBB.
“Now RBB will be easily saleable as it has improved its service quality and brand image as a competitive modern bank,” adds Acharya. Reform, recapitalisation and professionalisation are the long-term goals of the programme. The immediate step will, now, be to hire sales advisors. These advisors will undertake due diligence, prepare a prospectus for the banks and then undertake a road show to bring them to the point of sale to the buyers.
There is yet another facet of the reform. “Capital injection is a must to run these institutions professionally and autonomously. Around Rs 10 billion for RBB and Rs 3 billion for NBL, after re-evaluating their assets, will give any private bank a hard competition,” says Uprety adding the government's commitment is more important.
Along with the numerical growth and other institutional developments in the financial sector like stock markets and insurance companies, the deposits and credits are also expanding though the qualitative aspects of the financial system still require much improvement as reflected in the inadequacy of the banks and financial institutions in providing increased benefits to the general public and in contributing adequately to the economic development through raising income level, creating employment opportunities and building internal strength for the growth of the institutions themselves.
Despite controversies and adversities, a healthy financial sector is a pre-requisite to sustainable economic growth. By getting rid of the various institutional and structural deficiencies that still prevail in the system, further reform measures need to be continued, initiated and implemented to create a strong economic sector and for the economic health of the country. Apart from effective implementation of various legislations like Insolvency, Secured Transaction laws, enhanced credit information and debt recovery tribunal with adequate capacity and resources, professional economic journalism and better training for staff in financial institutions will certainly help reform the financial sector reform.
Finally, the government also needs to focus on how best to deal with the large retained losses accumulated over the years by NBL and RBB which still results in a negative net worth of Rs 6.1 billion (NBL) and Rs 18 billion (RBB), a combined negative net worth of about seven per cent of GDP.
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World Bank’s assistance to continue…
Rajib Upadhya
Sr. External Affairs Specialist, the World Bank
What is the involvement of the World Bank in Nepal’s financial sector reforms?
In response to the government's request for technical and financial support to its financial sector reforms programme, the World Bank has been providing support to Nepal in this area since 2002. So far, between the World Bank and DFID, we have allocated about Rs 7 billion under two projects to implement the programme.
Are the reforms going as smoothly as planned?
When we got into this area, neither the government nor the World Bank had any illusions about the challenges of reforming the financial sector. Nevertheless, we agreed that this was too important an area not to give our best effort.
How is World Bank responding to the dispute between the ICCMT and NRB?
The recent controversy was indeed unfortunate. But there are lessons that we hope will help prevent such controversies in the future. I think we are now past this episode, and we look forward to refocus our attention on important tasks ahead.
How does World Bank assess the reform progress?
I think we have good reasons to believe that overall performance has been satisfactory. Of course, we would have hoped that some things would have moved sooner and with more determination. But there is a context in which our work is anchored. Had this context been more favourable, I think progress would have been more rapid and more substantial.
To cite a few examples of progress, in the four years before 1999-2000 and 2000-2003, NBL and RBB had accumulated combined operating losses of Rs 28.9 billion. In the three years between 2003-2004 and 2005-2006, when external management teams were in place, NBL and RBB registered combined profits of Rs 7.7 billion. This turnaround is truly remarkable.
Before the management takeover of NBL in July 2002 and RBB in February 2003, the extent of bad loans in the portfolios was unknown. The audit teams subsequently confirmed that more than 60 per cent of the total loans in each of the banks were NPA as of July 2003. With vigorous debt recovery efforts, the NPA levels have been reduced to 34 per cent (Rs 7.8 billion) in RBB and 16 per cent (Rs 2 billion) in NBL as of January 2007. In terms of cash, debt recovery since 2003 in these two banks has amounted to Rs 17.9 billion.
Financial disclosure standards have improved. Before the management takeover, the statutory financial audit at one point was actually delayed by more than three years. Now both banks publish provisional financial statements within a month (ahead of most private and joint venture banks) and audits are compliant with International Accounting Standards (IAS), while at least one bank completes it within the Central Bank's stipulated timeframe. Disclosure standards have definitely improved.
Investments in re-engineering NRB have produced a better trained / skilled staff and a better legal / regulatory framework, enhancing NRB's regulatory and monitoring capacity.
Nevertheless, with the increase in the number of players in the financial market and an increasing share of financial assets in the economy, NRB still requires further strengthening of its bank supervision capacity to enhance its role as a more effective and professional regulator.
In July 2003, staffing levels at NBL and RBB stood at 5,269 and 5,402 respectively. As of January 2007, the number of staff had been reduced (through various VRSs to 2,960 and 3,301 respectively, despite hiring new commerce graduates (123 in NBL and 65 in RBB) to inject new blood into the system. Staff at NRB was reduced by about 20 per cent (from about 2,000 to 1,554) with the ratio of support to professional staff reducing from 5.5 to 2.2. In addition, about 300 staff members have received special training (mostly abroad) in the areas of regulations, audit, legal framework, IT, supervision, human resources and financial management.
What will be the future course of financial sector reform in Nepal?
There has been tremendous growth in the number of financial institutions in Nepal over the past decade. Similarly, assets of the financial system have witnessed consistent growth over the last half-decade signifying the increasing role of banking and financial institutions in the economy. Total assets of the financial system to GDP (in current prices) increased from 59.4 per cent (July 2000) to 89.6 per cent (July 2005) to 93.4 per cent (January 2006). Indicating an increased financial deepening, M2/GDP has grown favourably over the last decade.
Starting from only 8.7 per cent in 1965, it rose to 30 per cent in the early 1990s and reached about 40 per cent by the mid 1990s. Since 2001 the ratio has exceed 50 per cent, reaching 62 per cent in April 2006, a level comparable to middle income countries. The growth in this ratio implies an expansion of the financial intermediation sector relative to the rest of the economy.
This needs to be complemented by a better environment such as enhanced credit information and debt recovery tribunal with adequate capacity and resources; improved financial journalism; and better training for staff in financial institutions.
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Achievements
· Debt Recovery Act 2002. This legislative framework is a new attempt to make loan recovery effective and reduce the burning problem of NPA of the banking system.
· Bank and Financial Institutions Ordinance. By this Act, the fragmented legal bases such as Commercial Bank Act, Finance Companies Act, Development Bank Act and other laws governing deposit-taking financial institutions have come under the single legislation. This has also tighten the regulatory rules governing those financial institutions.
· Public Debt Act and Foreign Exchange Regulation Act has been amended to make them up-to-date.
· Secured Transactions Ordinance, Insolvency Ordinance and Securities Ordinance, Company Ordinance, Fiscal Transparency Ordinance and Anti-Money laundering Ordinance are yet another achievement.
· Similarly, NRB has formulated and issued various prudential regulations for implementation to ensure a safe, sound and efficient financial system, like capital adequacy, loan classification and provisioning, credit concentration and single obligor limits, accounting policies and formats of financial statements, management and minimisation of risk, good corporate governance, Provisions relating to investment in shares and securities etc.
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