E-Kantipur

In the last one and a half years amid various upheavals in the financial system, Nepal Rastra Bank declared a number of financial institutions to be problematic after scrutinising them, but it offered no rescue package to save them from collapse. The question is how things developed so rapidly in these institutions in a short period of time. Expert opinions and market circles hold that the reason for their liquidity crunch is the overcrowding effect and non-optimal distribution of funds. The crux of the problem is that too many banks and financial institutions (BFIs) have been given licenses to operate without considering their economic viability, feasibility and justification for existence leading to unhealthy competition.

The general opinion is that monitoring and supervision has not been effective, and the central bank too has admitted that it lacks adequate manpower to keep an eye on all the BFIs. At the same time, no seriousness has been shown in improving the performance of these institutions. A recent IMF mission concluded that a crowded financial sector containing 219 BFIs (31 commercial banks, 87 development banks, 80 finance companies and 21 micro finance development banks) was responsible for the crisis. This is the finding of the Financial Access Survey (FAS) which recommended a stop to issuing licenses to BFIs.

Financial fraud and embezzlement of funds that have been going on undetected for years have been revealed by investigations conducted by the concerned authorities. One glaring instance of financial crime involves Nepal Share Market and Finance (NSMF). As the goings-on were unravelled, it became apparent that there was no corporate governance in that institution.

The question is, who will be made responsible for playing with the money of the investors, the depositors and shareholders? If NSMF goes under, investors will lose their money, so NRB has to think about this matter. The central bank should consider things at two levels, company executives committing fraud and saving the institution from collapse. Action must be taken on against the dishonest executives but NSMF must be saved so that trust in the institution is maintained. NRB should not take action against the institution and let go the culprits responsible for causing losses to the investors.

Another instance concerns Vibor Bikas Bank which faced a liquidity crunch due to excessive investment in real estate. In this regard, NRB provided Rs 50 million in refinancing to save the development bank on the condition that it go for a merger. This is a good example of NRB’s farsightedness. However, the central bank did not rescue other development banks like Nepal Development Bank and United Development Bank stating that they were not viable. This has raised doubts among investors regarding NRB’s commitment to protect BFIs.

The case of Gorkha Development Bank (GDB) is different. Its promoters and directors were directly involved in using the institution’s funds to invest in real estate and shares with a view to get rich quick. Their plans fell apart after real estate prices plunged and they could not repay their loans. The issue has been resolved after a change in the management, but political interference brought back the same crooked person as the bank’s head. NRB rightly took action against this development bank to protect its depositors. GDB suffered a loss of reputation although improvements are being made with promoters injecting cash into it. Similarly, problems at Infrastructure Development Bank and Public Development Bank were resolved after a change in management. NRB did not interfere considering the correction made in these institutions. The story is that NRB as facilitator and protector of the public’s money did not seriously consider how to save the financial institutions where people have deposited their savings trusting that there would be supervision and monitoring by the central bank. Take the case of finance companies such as Samjhana Finance which was sent into liquidation and others like People’s Finance, Capital Merchant Bank and Finance and World Merchant Bank and Finance which are facing a liquidity crunch. NRB refused to rescue them by injecting cash stating that they lacked corporate governance.

The vital question is how far should NRB think about making a distinction between individual executives, board members and institutions. If individual executives and board members are involved in misconduct by manipulating the accounts and using fake documents, action should be taken against them while the institutions where the public’s money is involved through deposits and investments should be allowed to continue to operate. It is a global practice that protecting and safeguarding the investors is the fiduciary responsibility of the regulating authority. But surprisingly in our country, NRB simply declares lack of corporate governance in these institutions without directly punishing the wrongdoers.

The regulatory body should have a clear vision that a financial institution to which it has given an operating license is to be protected in times of crisis. Financial institutions in trouble should be helped by not withdrawing institutional deposits from them or by injecting liquidity to make them run smoothly. Action should be taken against the management, board and others involved in financial scams and scandals.

It is the opinion of the public and experts that there has been a regulatory lapse as shown by events that NRB has not supervised some institutions like NSMF, People’s Finance, Gorkha Development Bank and many others for a long period. In all these institutions, if there had been timely supervision and monitoring with a sense of seriousness, many of the unfavourable events and financial scandals could have been avoided to a great extent.

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