KATHMANDU: Bankers and bank promoters were huddled in hectic meetings and on their cell phones last week, trying to figure out

the quandary they found themselves in after Nepal Rastra Bank (NRB) issued its Unified Directives. While the directives cover a wide range of issues, some issues raised alarm among bankers because they appeared ambiguous, unsubstantiated and impractical. As the week unfolded, clarifications were made and discussions are still ongoing between bankers and central bank officials on practical

problems in their implementation. But what was visible cause for concern were the evident differences between BFIs and the central bank. Lack of communication led to this relationship taking a nose dive, as suspicion and speculation ruled rife.

Anil Shah, CEO of Mega Bank says, “The new directives were expected but the way it emerged certainly brought an element of

surprise. Nepal Bankers’ Association (NBA) was in dialogue for a while with NRB officials and discussions have been held and many issues settled through dialogue. While NBA had made 31 recommendations and 18 were incorporated, the inclusion of some points that were never discussed is what surprises us.” Shah says that he fully agrees with the NRB’s need to bring about stronger regulations and supports the directives but he felt that they needed to be more practical for implementation. “There is representation from NBA and if there was prior discussion on these issues, such a situation would never have risen. The existing confusion will no doubt be sorted in

the coming days but such a situation could have been avoided, as banking is a very sensitive industry.”

Ashok Rana, CEO of Himalayan Bank and president of NBA says, “There are a number of issues that need clarity and our committee that has dialogue with NRB is going to make recommend-ations on where we feel there will be practical problems

in implementation.” He also agrees that such a situation was not conducive for the banking sector and needs to be diffused and avoided. “While we support the directives and understand there may have been abuse in some cases, it is not fair to generalise the entire banking sector. We think there is a greater need for participatory approach and we appeal to NRB to be more consultative before issuing such directives.” He says since some of the points were never discussed, it created the mayhem. “It affects the mood, tone and trust between promoters and the central bank and creates a tense atmosphere,” he adds.

Sashin Joshi, CEO of NIC Bank, says, “I believe that the central bank is now quite positive about coming with some slight amendments

because of the practical problems we have pointed out.” He elucidates that confusion was created because of two specific issues. “One

particular directive says that bank CEOs, directors and senior management cannot avail of any loans. They have now verbally clarified it only applies to loans in their own names and does not apply to loans taken in the names of their business and also loans taken in the names of family members. The second is in terms of repayment of personal loans, and we have said that it is impossible to repay that amount overnight, and that a reasonable time frame must be given. We requested a time frame of three years as reasonable. Banks are positive that these requests will be accommodated.”

Nepal’s banking sector in the past has seen banks declared crisis ridden and go into liquidation due to poor corporate governance and promoters’ and directors’ vested financial interest. Studies also show that promoters of commercial banks themselves are the biggest borrowers of margin lending — loans against collaterals of shares they own — and it is a problem for Nepal´s financial system. Bankers agree that the directives seek to improve corporate governance and that is something everyone supports. Rajendra Khetan, chairman of Laxmi Bank, says, “I support these strong steps from the regulating body, which should have been taken long back. The hitch is that we have been very lax for years but the situation now demands strong and prudent direction.” Khetan says the banking sector will benefit in the long term from more prudent practice. “Banks now have excess liquidity and the lending side may be squeezed as promoters now cannot get private loans, but this money can be used for economic activities and though it could take few years to get started it is certainly the right thing to do,” he opines.

He says that greater corporate governance is the need of the hour and the directives are in line with Basel Standards for banking regulators, which Nepal has been implementing since the last three years. “While it may seem difficult and there will be some pain, it is based on strong proven practice. Nepal is ahead of many developed countries in terms of implementation, and full implementation will ensure banks are strong. It will benefit bankers, entrepreneurs and the whole economy,” he says. According to him, while the directives are on track, NRB possibly needs to provide some timeframe for their implementation.

The easy licensing policy adopted over the last decade is perhaps the main reason behind the present problems in the financial sector. While the number of BFIs soared, the supervisory capacity of the central bank remained same. With far too many players, the problem has

become acute in the present economic situation. Some bankers feel that the central bank should be more effective in monitoring and dealing with individual institutions who are flouting the norms instead of generalising and coming up with such sweeping directives while others understand that it is not really possible. “Corporate governance should ideally be handled by the banks themselves but the problem is we have big commercial banks and then there are hundreds of other small finance companies and development banks guided under the same rules and laws. Even though many follow prudent practices, there are too many players and it’s difficult for the central bank to monitor all

of them. While it may seem like micro managing to the larger commercial banks, the central bank may have no choice except such a

blanket,” Khetan says.

But then the central bank has to take part of the accountability for this problem in the first place. “They literally left, right and centre provided licence to people just because they had the money rather than looking at the need and whether so many institutions were required. They would like to correct this now and it may seem a little harsh at the moment,” says Joshi.