Dissent on the Bafia Bill

An amendment proposal has been submitted on the basis that when bankers and businessmen are the same person, there is a conflict of interests, if they are separated, corporate governance will be maintained. It is more realistic to think that there should be a meaningful partnership between the bank and the commercial sector in order to provide the sustainable interest and stability of the business, to harmonize the interests of lenders and investors, to connect the interest of the bank with the continuous success of the business rather than forced debt recovery. However, ignoring these basic aspects, the government's policy of displacing nine decades of banking practice without foundation and research has created a kind of panic among stakeholders.

In the context of Nepal, the disparity between the rich and the poor is very wide. The economic class appears to be limited. Attempts to ignore this reality and divert those with resources from investing in banks, an important part of the economy, are more likely to be unfortunate.

Objective Theoretical Disagreement

In Nepal, until the 1940s, only government-invested banks dominated, businessmen and industrialists were interested in the operation of banks and financial institutions in accordance with the policy of economic liberalization and privatization adopted by the country. Since then, according to the state policy, business houses have invested a large share in banks and financial institutions. But recently, the government has tried to shake up the existing system by amending the law with proposals that will be implemented immediately. The legislative argument that a banker and a businessman should not be the same person does not seem to be based on good banking practices, principles of corporate governance and research or evidence. It is relevant to discuss some theoretical aspects, existing practices and good practices in the country.

Various researches in the world have shown that corporate governance is further strengthened when there is ownership or meaningful interest in the bank's business. Research done by Raghuram Rajan in 1992 showed that banks can regulate business more than public bond holders. Likewise, the researches of Kaplan, Milton, Nakamura and other economists have shown that banks play a positive role in maintaining the corporate governance of companies, restructuring and running them. Apart from Britain and America, which are among the major economies of the world, Japan, Germany, France and other countries, it is believed that in order to maintain institutional governance, there should be an interdependent relationship between commercial establishments and banking-financial institutions. In these countries, banks not only provide loans to businessmen but also provide them with a certain ratio of shares, giving them dual shareholder status. It is believed that this will help each other for the commercial interest and long-term survival of both the borrower and the bank.

Especially in the context of Japan, the structure of business and commerce there is bank-centric. Accordingly, in various businesses of the economy, banks take both credit and ownership to build a network of banks and businesses. This type of network is called keiretsu. For example, the Mitsubishi Group has various businesses. It has a network of 600 companies in various fields including Mitsubishi Motor for vehicle production, Meiji Asuda Insurance for insurance, Mitsubishi Estate for real estate and construction, and Mitsubishi Construction. At the center of that network is Bank of Tokyo Mitsubishi UJF. Who has both loan investment and share ownership in these companies. German banks have played an even bigger role than Japanese banks in the

business sector. Germany's main bank (the Universal Bank) gets to hold shares in the businesses. Until a few years ago, Deutsche Bank owned a significant portion of Daimler-Benz, the maker of the world-famous Mercedes car. Although the German bank has a limited share investment in the business, other shareholders of the business also make the bank the custodian of their shares. This ultimately confirms that banks are the real decision makers of the business. Various studies by Alexander Groschen and others have also shown that the close relationship between banks and companies was the main success factor of German industrialization.

Therefore, the argument that bankers and businesses should be different for institutional governance is not correct in principle. However, the principles of the UK and US banking systems are exactly the opposite. It is the principle of these countries that the interest of the bank is only focused on making proper loan investments and extracting maximum returns. However, even during the global recession of 2008, there is a growing opinion that the practice of British and American banking systems should be reviewed as they were profit-oriented and insensitive to borrowers.

Even in Nepal, the respected Supreme Court has said that the relationship between the bank and its customer borrowers should not be a competition of their own interests, but should be of mutual and complementary nature. Taking advantage of the obligation to take a loan, the borrower is subjected to financial and legal burdensome conditions and subordinated to the investor, instead of making a positive contribution to the economy, there are various decisions that have been made. Therefore, before passing the Bafia amendment, it seems necessary to objectively analyze which of the stakeholder-centric approaches of the United Kingdom and the United States and Japan and Germany, which have a shareholder-centric approach.

experiences, terrain and options

The debate that bankers and businessmen should be different is not new. In the neighboring country of India, private banks were nationalized in 1969 with the aim of ensuring financial inclusion, saying that only a limited number of traders benefited when bankers and traders were the same. However, the Indian government's move was motivated by political gain rather than economic principles. Prime Minister Indira Gandhi was besieged by a group of old powerful leaders within the Congress Party, known as the Syndicate, which dominated Indian politics at the time. Also the businessmen also supported the syndicate leader Morarji Desai. In such a challenging situation, it is understood that Indira Gandhi took this step to strengthen her position.

The impact of the nationalization is still felt by the Indian economy. As major banks are under the control of the government, most of the bank loans are used by businessmen close to power. South Korea's experience is no different. Commercial networks (chaebol) including Samsung, LG, Hyundai, SK and Lote have managed to establish their dominance by using most of the bank funds, loans and grants under the guise of alliance with politicians. As a result, corruption is rampant and institutional governance is in trouble.

Nepal's own experience in this regard has been more negative. The example of improper activities between the employees and businessmen of Nepal Bank and National Commercial Bank under political patronage has affected the economy of the country as a whole. The research of various economists has also shown that politicians misuse government-owned banks to advance their political goals and maintain power.

If the proposed Bafia amendment is passed, the person who has significant ownership in the bank chooses the option to separate from the bank, which is very likely, there will be a situation where non-business investors will have to be found. The ideological ground of the current proposed amendment in Nepal is not different from the debate going on at that time that when bankers and traders became one in India, only a limited number of traders benefited. As in India, in Nepal, the government or a government organization is a potential investor with financial standing. But due to the issues of corporate governance seen in the government-controlled banks in India in the current year, it seems to be indicating that the way for the business houses to invest in shares will be opened. Considering our past experience and researches in the world, although the government or government institute is a potential investor with financial status, it is not a reasonable option from a long-term perspective for institutional governance.

Nepal has limited resources due to internal conflicts, unstable government, political confusion, delays in law amendments and judicial pronouncements, growing lawlessness, unprofessionalism and weak bureaucracy. Due to the adverse conditions in the professional environment, not only students but also large skilled manpower are migrating abroad and are still searching for opportunities. As a result of this overall situation, national capital or classes with capital have not been able to be built on a large scale. So that when the Bafia Amendment is passed, we are left with objectively limited options. One option is for the majority shareholder to sell his shares to the general public in the stock market. Selling through the stock market completely changes the size of the share ownership. In time, there will be no dominant person or group in the bank. A shareholder structure will be created where many shareholders are dispersed but everyone has a small share. In this type of dispersed unincorporated shareholder structure, managers dominate over owners. Which is different from the current practice of Nepal.

In most developing countries including Nepal, India, and Sri Lanka, it seems that there are many types of shareholder structure with a limited number of people in the organization. As a result, a legal structure is created to protect the minority so that when the majority shareholder makes a decision in the organization, actions against the rights and interests of the minority shareholder may occur. Nepal's legal structure and regulatory bodies are also practiced in a structure that regulates and controls significant ownership or dominance. But in a dispersed shareholder structure, the actions of managers should be regulated rather than directors. As the manager can act against the interests of the dispersed shareholders, the manager needs a legal structure that seeks accountability. In this kind of structure, the principle of institutional sushan is different. As the

moves towards a system of managerial accountability, the overall law should be restructured accordingly. Basically, effective securities markets, efficient courts, strict reporting standards and active regulatory bodies are essential for the success of a managerial accountability system. Therefore, the existing regulatory practice as a whole will need to be revised. Which is not envisaged by this amendment bill. Therefore, when passing the half-raw proposed amendment, it seems that more attention should be given to other problems than solving the problem. A little less considered in search of a

alternative is the prospect of bringing in foreign investment. According to Section 5 of the Act on Banks and Financial Institutions 2073, any foreign bank or financial institution can own shares in an operating domestic bank as a joint investment with prior approval from the National Bank. As a result, when bankers and businessmen are separated, the way is open to bring in foreign investment. But due to the unstable government and policies, difficult business environment, rampant corruption, prison-centered legal system, etc., the situation of immediate foreign investment is less. Also, in sensitive areas such as banks and financial institutions, it is appropriate for the regulatory body to study the situation of each bank before approving foreign investment and make a decision only after formulating the state policy.

In squeeze

If the businessmen who are doing business despite the great earthquake, corona epidemic and political deviation are forced to sell their shares under uncomfortable conditions by taking away the rights and status granted by the law in the past, then there will be a serious negative impact on the country's economy. Therefore, instead of developing an appropriate mechanism to prevent illegal and unethical activities by any person or group, the proposal to amend the law to encourage exit from investment is neither fair nor practical.

In this decade, the state first decided to quadruple the capital of banks and financial institutions and forced businessmen to put money in the bank. When the Act was passed in 2073, when the founder shares were allowed to be changed to ordinary shares, they were forced to keep the shares of the bank with the insistence that there would be no rightful person to manage the bank. Now again the government has changed the policy that bankers and businessmen should be different. It is completely reckless and irresponsible to make so many policy changes in such a sensitive area within a decade. A vivid example of political instability.

Generally, when any law-making or amendment proposal is submitted, a draft should be prepared based on a detailed study and an objective assessment based on the analysis of the benefits and losses to the society and the state. For that, a group including the regulatory bodies at the highest level of the state should prepare a report, and after extensive discussions with economists, private sector, research institutes, universities and other stakeholders, draft laws should be prepared according to the suggestions. This is a normal process in a democratic state. But the process of drafting laws is not transparent.

Therefore, while proposing amendments to Bafia, it has been submitted without a comparative study of banking practices prevalent in the world, experiences of neighboring countries and an objective analysis of Nepal's regulatory structure. Also, the immediate implementation of the system will not only naturally lead to policy chaos but will encourage anti-governance activities. Therefore, it is not appropriate to pass the proposed Bafia Amendment Bill as it stands.