Central bank nod must to hire or fire chief executive officer

Banks and financial institutions (BFIs) will now have to take permission from the central bank to hire as well as fire their chief executive officers (CEOs).
The bill to amend the Banks and Financial Institutions Act-2017, registered at the Parliament by Finance Minister Dr Yuba Raj Khatiwada yesterday has proposed mandatory consent from the central bank for banks and financial institutions to recruit or dismiss their chief executives. Earlier, the board of directors of the BFIs could appoint or sack chief executives on their own.
The government is introducing the provision to address the trend of BFIs’ board pressuring the chief executive to issue loans to people based on their recommendations and also at low interest rates. In such a context, the chief executive had no option but to accept recommendation of board members or quit.
The provision has been proposed to make the chief executive officer more professional, the central bank claimed, adding that the provision of taking consent before hiring or firing chief executive is certain to dishearten the boards of directors. “But the bankers themselves also not seem to be happy with the new provision proposed in the amendment bill of BAFIA as according to them, allowing the board to appoint the chief executive makes the board more responsible towards activities and decisions of the bank.”
They said that the central bank should focus on ensuring the appointment of more professional directors in the board. The central bank’s interference in appointment and dismissal of chief executives seems to be driven by the fact that 90 per cent of investment in banks is from public and thus the chief executive should be made more responsible.
They also claimed that the proposed provision is restrictive in nature. The central bank has already set the criteria for qualification and experience that a bank’s chief executive, now the central bank should focus on whether the boards of directors are making appointments of chief executives accordingly or not.
Likewise, the bill – to amend BAFIA – has also fixed maximum of two tenures – altogether four years – for board members at the banks and financial institutions.

Central Bank plans to separate industrialist and bankers

Central bank mulls to dismantle industrialist-bank nexus to avert possible risk in the financial sector.
Nepal Rastra Bank (NRB) governor Dr Chiranjibi Nepal said that the financial sector regulator plans to dismantle the business-bank nexus also to avert conflict of interest.
Though, six years ago then governor and incumbent finance minister Dr Yuba Raj Khatiwada advised bank directors to either become a banker or a businessperson, the central bank has not been able to separate banker and business person as most of the banks and financial institutions have been promoted by the businessmen and industrialists.
It is the central bank’s responsibility to keep hawk’s eye on the banks as they are only the custodians of the public money, he said, adding that the Finance Ministry is preparing an amendment to the Bank and Financial Institutions Act (BAFIA) 2017 including the provision of separating industrialist and banker.
The regulator’s move to include a provision forbidding industrialists and business owners – on the basis of their investment in other private companies – from taking the helm of financial institutions as directors will come after the amendment of the BAFIA is approved by the house.
The amended law is expected to control the practice of injecting public deposits in right shares by directors of financial institutions. Currently, the central bank has barred directors of a bank from withdrawing loans from the financial institution they represent.
In India, a person is not allowed to run a business and a bank simultaneously. And Nepal is trying to follow the Indian model in the banking.
The amendment in the BAFIA-2017 will also have provision that a bank requires to appoint its chief executive officer only after central bank’s screening of the candidate. “A fit and proper test of proposed CEOs, who guide the banks, is necessity of the time.”

Banks may need central bank permission to appoint CEO

The government is planning to introduce a new law, which will require banks and financial institutions to get approval from central bank before appointing their chief executive officers (CEO), though promoters are not happy with the regulatory body’s plan.
Nepal Rastra Bank (NRB) is in the process of amending the Banks and Financial Institutions Act (BAFIA) including a provision that calls for central bank's approval to appoint chief executive officer. "The board of directors of BFIs will need to get go-ahead of central bank before naming its chief executive," according to a source at the central bank.
"The provision is thought as the BFIS are appointing their yes-man hurting the corporate governance," he said, adding that the banking industry is completely different from other businesses as they are the custodians of public money. "Therefore, the chief executive should not only be responsible to the board of directors but also to the depositors."
The chief executive manages the bank, and he should be made more responsible for the public money, he added.
Due to enough regulatory directions, the BFIS are claimed to be the most transparent and accountable sector. The central bank new move is thus feared to micro manage BFIs. According to the proposed provision, the BFIs will send three proposed names to the central bank and the regulatory authority will appoint one of them as the chief executive of the BFI.

World Bank-IMF team suggests central bank to monitor big co-operatives

Financial Sector Assessment Team of World Bank and International Monetary Fund (IMF) has asked the central bank to supervise big cooperatives as  

Department of Cooperatives failed to regulate them due to its lack of capacity.

During an interaction with the central bank officials, the team also suggested the central bank to add a provision in Nepal Rastra Bank Act and Bank and Financial Institution Act (Bafia) – under class D financial institutions – to help it regulate big cooperatives.

In recent years, the cooperatives have become more vulnerable and have been misinterpreted to collect money from common people to invest in land, housing and stocks. The department that is entrusted with the right to monitor and take action against the foul players has failed to safeguard the depositors money and encouraged the cheaters and frauds deviating from the universal cooperative principle.

The team under the Financial Sector Assessment Programme has collected information about financial sector from different stakeholders, including regulators and financial institutions, and presented their initial assessment to the central bank.

The two institutions that have been helping central bank to protect the financial sector will give a final report in late June.

According to the latest data, some Rs 133.82 billion deposit of the general people in cooperatives is in risk due to lack of regulator and insurance.

Though the government has formed a commission to investigate the troubled cooperative that has received complaints against 70 cooperatives with around Rs 8 billion, the cooperatives are still cheating the depositors with the political patronage.

Currently, there are some 29,526 cooperatives – out of the total some 12,916 saving and credit cooperatives – as of last fiscal year. They mobilise deposit and flow loans like banks and financial institutions that are central bank regulated.

Despite strong monitoring and regulation, some banks and financial institutions are playing foul, the cooperatives has neither regulator nor monitor leaving the field open for frauds and cheaters.

Meanwhile, the visiting team also suggested the central bank powerful enough to liquidate troubled banks and financial institutions.

The central bank seeking amending in the Bafia and Nepal Rastra Bank Act seeking the power to liquidate the troubled banks and financial institutions.

Nepal requests World Bank to continue Development Policy Credit-2

Nepal has asked World Bank (WB) to continue loan assistance under Development Policy Credit-2 programme within the current fiscal year.

"As the Development Policy Credit-1 has helped Nepal, the continuation of the programme under budgetary support will make the government easier to prepare budget," said finance secretary Shanta Raj Subedi during a meeting with visiting World Bank mission in the capital here today.

The government will get $70 million (around Rs 7 billion) in loan assistance under Development Policy Credit-2 for the next fiscal year’s budget.

The government and World Bank have been working on budgetary support for Nepal worth $100 million for the last three years.

Last year, the World Bank provided $30 million in credit under Development Policy Credit to help accelerate financial sector reform programme aimed at reducing the banking sector's vulnerability and increase transparency.

The $30 million that came under Development Policy Credit-2 programme was incorporated in the current fiscal year's budget. The $70 million is the second tranche of the budgetary support.

The World Bank mission led by Gabi G Afram said that negotiations for Development Policy Credit-2 can be finalised in October or early November, though the Finance Ministry wants to complete the negotiation earlier to plan the resource distribution for the budget for nest fiscal year 2014-15.

Development Policy Credit comes as financial sector stability credit for financial sector reform programme. The Development Policy Credit-1 has supported Medium Term Financial Sector Reforms Programme that has prepared a long-term financial sector reform strategy, increased financial access and helped recapitalise Nepal Rastra Bank and Rastriya Banijya Bank.

The World Bank will take stock of past performances of the government before committing its continuation.

The Finance Ministry claimed that the reform is on track as it is amending the Nepal Rastra Bank Act and Banks and Financial Institutions Act (Bafia) – both of which are currently in Parliament – apart from drafting Deposit Insurance Act.

Likewise, capitalisation of Nepal Bank and Rastriya Banijya Bank is also underway. Nepal Bank has been selling its assets while Rastriya Banijya Bank is floating shares to increase its capital base, according to the ministry.

Banks will have to publish two different sets of financial statements

Since the country is adopting International Financial Reporting Standards (IFRS) from next fiscal year, banks will have to publish two different sets of financial statements, one according to regulatory authority's prescription and the other according to the international standard.

The banks and financial institutions have to currently provision for loan loss according to the central bank prescribed time frame and percentage but the international standard format focuses on fair value based assessment of collateral instead of current format of time line for loan loss provisioning, according to chartered accountant and member of Accounting Standard Board (ASB) Parakram Sharma.

“The standards will be based mainly on financial principles than on a rule-based system," Sharma added.

Currently, a bank has to provision 25 per cent in three months, 50 per cent in six months, and 100 per cent nine months for expected loan loss.

Though the format is expected to comply with the norms of the concerned regulators also apart from international auditing standards, there could be different need of the regulatory authority, he said, adding that in the US also, the companies publish both sets of financial reporting.

The IFRS is focused on strengthening the accounting system and also bring global harmonisation in the financial reporting that will help gauge the actual financial health of a company. It would be based on general purpose financial statements that measure the various financial components in fair value instead of the timeframe value being implemented now.

As the government is planning to implement the IFRS from the next fiscal year 2014-15, in the first phase, multinational companies and listed State Owned Enterprises (SOEs) with minimum paid up capital of Rs 5 billion – except Banks and Financial Institutions under BAFIA Act, 2006 – will start implementation of the new financial reporting format. In the second phase, in the fiscal year 2015-16, the commercial banks including state owned commercial banks, and all other listed State Owned Enterprises have to implement the new format for financial reporting. Likewise, in the third phase, all other financial institutions, all other SOEs, insurance companies, all the listed companies, and all other corporate bodies/entities not defined as SMEs or entities having borrowing with minimum of Rs 500 million will have to implement from the fiscal year 2016-17. The Small and Medium Enterprises (SMEs) – defined by Accounting Standard Board – will also implement it by the fiscal year 2016-17.

"Though, the government will fully implement new financial reporting standards by 2017, implementation in SMEs should be well thought and planned as only 57 countries have implemented the standard reporting format for SMEs, out of total 122 countries that are using the international format of financial reporting currently," according to auditor General Bhanu Prasad Acharya.

Developed by the International Accounting Standards Board as a system of keeping accounts of companies that would be recognised universally, the IFRS helps bring in foreign investors as the financial reporting standard harmonises globally.

Institute of Chartered Accountants of Nepal (ICAN) and Accounting Standard Board is working jointly in cooperation with the Office of the Auditor General to implement the IFRS as Nepal missed the earlier time frame of implementation.

Though Nepal committed to implement the global standard from 2011, it failed due to various technical reasons.

Currently, Nepal Accounting Standards is in effect. With the aim of implementing the IFRS, the government has been providing training to officials of financial regulating bodies.

But for the international standard financial reporting, the financial statement reporting supply-chain has to be maintained from the preparer, who has to understand requirements of auditor to auditors, regulators and users, said chartered accountant Narendra Bhattarai.

Case filed against CIAA move

A case has been filed against the anti-graft body today claiming that interfere in the private banks and financial institutions does not fall under Commission for Investigation of Abuse of Authority (CIAA) jurisdiction.

An advocate Arjun Kumar Aryal has filed a case at the Supreme Court claiming that the CIAA has no right to seek information directly from the banks and financial institutions. "The CIAA move will not only have negative impacts on banks and financial institutions but also have adverse impact on overall economy," Aryal claimed, adding that the banks and financial institutions come under the central bank's jurisdiction. "Only Nepal Rastra Bank Act 2058 BS has the right to regulate the banks and financial institutions."

The CIAA has been trying to tame and terrorise the financial sector going out of its jurisdiction, he has claimed.

On Monday, a private sector representatives – including bankers – have met central bank governor DR Yubaraj Khatiwada and expressed serious concerns over the CIAA's demand of details about borrowers of banks and financial institutions.

They have informed the governor of adverse affect after the CIAA interference. "The CIAA move could affect domestic and foreign investment in the country," they have added.

The CIAA has been seeking details of loans, share ownership, foreign investment and exemption of penalty and interest amount to recover the loans, from about a dozen commercial banks.

The Bank and Financial Institution have provisioned that they should maintain the customers’ information secret, and the CIAA move will send negative message.
The central bank has also failed to resist the anti-graft body's move despite being an autonomous regulating authority of the banks and financial institutions.

Aryal claimed that clause 79 of the Bank and Financial Institution Act 2006 allows the banks and financial institutions to provide the details about accounts of a person, firm, company and institution and licensed institutions, if the Finance Ministry and the central bank direct them for any specific investigation by disclosing the reasons for demanding the information.

The CIAA has been seeking details from the government-owned banks directly, and private sector banks through the central bank about the borrowers that received loans over Rs 10 million.

Central bank declares General Finance crisis-ridden

The central bank has declared General Finance a crisis-ridden financial institution as its financial health worsened due to its failure to follow Nepal Rastra Bank’s directives issued some eight months ago.

According to the central bank, lack of internal control management, good corporate governance, prudential banking norms and weakness in risk management have made the finance company a troubled financial institution.

The class C financial company’s capital fund has turned negative by 16.83 per cent as of mid-April 2013, from a negative of 8.73 per cent a year ago, according to the central bank that claimed that it was a clear indication of the company’s failure in following the central bank’s directives.

The company has Rs 184.57 million NPL, an additional Rs 5.22 million was lent by breaching the single obligor limit, apart from Rs 41.45 million insider lending against Bank and Financial Institution Act (BAFIA).
Nepal Rastra Bank had during its supervision reduced these amounts from the core capital of the company last year.

The central bank has also issued a 13-point directive to General Finance. It has asked the company to maintain capital fund according to the Nepal Rastra Bank’s directives, barred deposit collection and lending, reduce non-performing loans to five per cent, not to increase salary and facilities to board members and employees, not to distribute dividend, carry out a due diligence audit and get financial transactions audited, apart from banning it to open new branches.

The finance company also has asked it to take prior approval before making payment of more than Rs 200,000 and selling its fixed assets.

However, the central bank is still hopeful of the recovery of the finance company, if its directors repay their loans. As a precaution, the central bank had blocked the accounts of 13 officials – including its chairman Upendra Narayan Shrestha, directors Kishor Kumar Maharjan, Krishna Prasad Shrestha, Kapoor Prasad Vaijoo, Bipin Timla, Mahendra Prasad Shrestha and Sidhi Das Sayami, chief executive Prakash Kumar Dhungana and GM Raju Kumar Pradhan – and clients of the company, including all of the board members and top management.