Good corporate governance in shambles

The Nepal Rastra Bank (NRB) has created waves recently. As the central bank, it is the guardian of the financial institutions that take people's deposits. Some think NRB's recent bold decisions were uncalled for but others think that the central bank took too long a time for these decisions, which should have come much earlier to protect the public money.
Nepal Bankers Association (NBA) claims that the banking sector has the highest standards of corporate governance. It is true in comparison with many other institutions in the country, which are completely non-transparent.
This is one of the reasons why the financial sector has shown encouraging growth in the country. But there is always considerable scope for improvement. The recent case of Bank of Kathmandu (BoK) is just a tip of the iceberg.
The dispute in the BoK's board led to the takeover of its management -- though for a short period of three months -- by the central bank.
But in the case of National Life Insurance Company Ltd (NLICL), a non-financial institution -- the regulatory authority of the insurance companies, Beema Samiti, cannot take such a decision. It is yet another case of lack of good corporate governance.
Beema Samiti has requested the central bank to temporarily freeze the accounts of the NLICL. The central bank has also frozen its accounts. The other financial institutions are not without problems or disputes afflicting their governing boards. Admittedly, serious disputes among the directors could hit the financial health of the institution concerned, making public money vulnerable.
In making the takeover decision on the BoK, the NRB governor Dipendra Bahadur Kshetry sought to send out a certain message to other financial institutions, but the million dollar question is, has the message come across powerfully?
Still, there is serious dispute in some of the financial institutions and they have shown no signs of correcting themselves and adopting internal good internal governance.
"Takeover was an unfortunate decision," a former governor said, adding that however NRB could not afford to encourage such practice of lack of good corporate governance. As the financial institutions are the custodians of public deposits, the central bank must ensure their safety. The issue of Bank of Kathmandu would never have reached the central bank inviting it to take over its management had the BoK Board acted as suggested by the central authority. "It's the result of lack of internal good governance," the chairman of a financial institution said adding that the institution has to be run by the professionals.
Sachin Joshi, president of Nepal Bankers Association (NBA) and the CEO of the NIC Bank, agrees. "There should be a clear separation between the Board of Directors (BoD) and Management, as the latter is fully entrusted with day-to-day management and is accountable to the Board of Directors that makes the bank's policy.
The central bank sought an explanation following a dispute over the BoK board's move to recall its managing director Radhesh Pant. The four directors of BoK had decided against Pant while the remaining two -- Sitaram Thapaliya and Sudarshan Poudel - had supported Pant. The central bank -- following the BoK Board's 'unsatisfactory' clarification about the action against Pant, who has been running the institution profitably -- took over the bank's management.
Similarly, the seven board members of NLICL have been divided into two rival camps for the last six months. Former chairman Dambar Bahadur Malla and present chairman Prema Rajya Lakshmi Singh have claimed their majority in the management. Among the seven promoters, four are with Singh and three with Malla, each side claiming its majority in the Company Registrar's office and the Beema Samiti. But it remains unclear how the dispute will be resolved without affecting the future of the insurance company and its policyholders.
At present NLICL is in a sound financial condition like the BoK. But the same is not true of other financial institutions whose condition deteriorated following their boardroom disputes and because of their lack of internal good governance.
What better recent example could be given of the result of lack of internal good governance than the troubled Nepal Development Bank (NDB)? Uttam Pun, the Board chairman, and his henchmen used the bank to serve their personal interests. Dr Ramesh Kumar Bhattarai, one of the NDB board members during 2000-2001, who represented Employees' Provident Fund (EPF) - one of the founding promoters of the NDB -- said the one year as a Board director in the NDB was the most humiliating period of his career. “The NDB has not faced the present crisis overnight," he said.
The successive CEOs left, as they could not bear with the Board of Directors and the condition of the first development bank of Nepal started going down. According to the central bank's directives, NDB tried to hire a professional CEO, but none was interested as the Board and its chairman had undermined the post. The central bank repeatedly warned and gave directives to NDB to improve but it did not pay heed, going to the court instead. As a result, the central bank had to take the ultimate action - send it into liquidation.
The financial institutions should be more transparent, follow prudent norms and practice good internal governance. Otherwise, people will lose confidence in the financial sector itself. To prevent such a dire scenario, NRB should take action against the bad institutions to safeguard the good ones, their depositors and their shareholders. NRB should also increase its supervisory and monitoring capacity and act immediately, when and where necessary, to safeguard the interest of depositors, shareholders and promoters too.
Only in this way can the vibrant health of the financial sector be ensured and its role as the driver of the national economy realised.