For economic empowerment, it is necessary to operate banks and financial institutions in a fair, accountable and transparent manner. Economic empowerment can be effective only with transparency, accountability and good governance in the financial sector as a whole.

Nepal’s banks and financial institutions are of international standards to follow. In fact, the regulatory practices adopted for banks in the European and American economies have also been used in Nepal. Looking at the aspect of risk management, Nepali banks have been following the best banking policies of these countries. However, there has been some delay in implementing some policies in line with the condition of Nepal’s economy and banking sector.

While talking about transparency in banks and financial institutions, it has been made mandatory to make public the service charges and their financial details on time. Similarly, whether banks and financial institutions fix the base rate or set the premium. All processes have to be transparent. As a result, it is possible to plan for the expansion of production by preparing the cost of mobilizing the resources of the financial sector.

For this, the central bank has kept in mind that the general public should get information about the interest rate corridor, the premium interest rate to be taken from the customers, the service charge charged, the institutional quarterly status, auditing, the annual general meeting, etc.

The said practice has also made the banks and financial institutions automatically accountable to remain transparent. Although there are some divided arguments in the approach to good governance, the central bank has been doing its best. Policy shortcomings have also been addressed on the basis of complexities seen in the course of implementation.

The central bank has clearly specified the structure of the board of directors of the banks and financial institutions and the functions of the committees to be carried out by the central bank keeping in mind the aspect of good governance. However, in recent times, voices have also been raised that the board of directors of banks and financial institutions should be independent. Preparations are underway to amend the Bank and Financial Institutions Act to address this voice.

Promoter shareholders are now seen in the directors of banks and financial institutions. As a result, there is a conflict of interest in the board of directors. In order to control this, the central bank has also recently exercised independent directorship, which is also in operation. However, there has been a strong demand for the separation of bankers and businessmen in the BAFIA Bill with the objective of making the entire board of directors independent and minimizing the conflict of interest.

In order to carry out effective activities in the context of good governance, banks and financial institutions have been working by forming various committees and sub-committees. There is a mandatory provision of sub-committees like Risk Management Committee, Audit Committee, Money Laundering Prevention Committee under the Board of Directors of banks and financial institutions. In addition to this, the central bank has been continuously interacting with the operators and managers of banks and financial institutions and receiving suggestions on adopting the international best practices as soon as possible. It has also facilitated the challenges seen in maintaining the good governance of the bank.

In the context of risk management, banks and financial institutions have a tradition of managing operating risk, market risk, credit risk and cyber risk due to the increasing technology-friendly banking services in recent times. There are some shortcomings in terms of the preparedness of the banks and financial institutions in managing these risks and how they have been working. In addition, the central bank’s regular regulation and supervision have not allowed much weakness.

The Nepal Rastra Bank (NRB) has tried to strengthen the economy by making various mandatory arrangements.TAG_OPEN_strong_56 It seeks to mobilize financial resources for economic growth by making centralized financial resources accessible to all. The government has also been implementing subsidized programs to contribute to the economy by expanding financial access.

In the context of Nepal, it is not necessary to say that the policy, rules and structures are not adequate. This is because the central bank learns from the events in the international context and embraces best practices. As a result, Nepal’s banking sector is one of the best in South Asia in terms of good governance, transparency and risk management. Nepal’s banking sector is currently following the principles of Basel III and OECD.

It has also been following the governance provisions of the World Bank÷. For example, banks and financial institutions should make provision for loan losses even in good loans. Its purpose is to reduce the risk of the financial sector. Apart from this, the provisions made by the central bank regarding loans are also for financial governance. The purpose is to mobilize the financial sector in such a way that it can contribute to the overall economy by utilizing the resources.

Onsite inspection and offsite supervision are conducted to see the status and effectiveness of the implementation of the regulatory standards implemented and set by the central bank. Also, there is a separate mechanism to address complaints if they are received. Looking at these aspects, while there are many efforts to maintain good governance in Nepal’s banking system, the repeated incidents of financial misappropriation show that there is room for improvement.

In the context of good governance, not only policy and regulatory standards but other aspects also have an equal role. For this, the effective presence and performance of some legal structures such as credit rating agencies, deposit and credit protection centers, credit information centers, etc. is also necessary. Although these institutions are known to be helpful for institutional governance, they are considered effective in terms of role. It cannot be denied that the increasing activism of these institutions in recent times has also helped in good governance of the financial sector.

About 81 percent of Nepal’s economy is contributed by the private sector. The financial sector is the main source of investment for the private sector. The private sector needs to depend on banks and financial institutions for financial resources as the capital market is not adequately developed in our country. At the same time, the bond or debenture market is not very developed. Except for a few companies listed on the stock market, there is very little practice of raising capital through debentures. Therefore, the financial sector is a reliable source of financial mobilization for the main base of the economy. Therefore, the financial sector should be vibrant and safe.

Apart from the provisions for good governance of the financial sector, there should be no control of a limited number of people in the banks and financial institutions. In addition, only a limited number of individuals or groups should not have access to financial resources. In this way, there is a need to make a policy to stop the practice of evergreening by investing in the traditional sector.

If the loan is evergreening in only one sector, the new enterprise business will suffer. If there is evergreening, then only an old sector or traditional investment will continue to get a loan, even if it is broken, it will continue to be added and that debt will continue to be evergreen. In order to control this, the central bank has made it mandatory to invest in agriculture, water resources and small and medium enterprises. It will increase domestic production and increase economic activity.

} The proposal to separate bankers and businessmen in the BAFIA Bill has been raised with the objective of making the entire board of directors independent and reducing the conflict of interest.

The central bank has made it mandatory to increase investment in the agriculture sector, which contributes around 25 percent to the country’s economy. For this, banks and financial institutions should invest 15 percent of their total loan investment in the agriculture sector by 2085 BS. Recognizing that the economy cannot be developed without developing the water resources sector, the NRB has made arrangements for compulsory investment. In the hydropower sector, 10 percent of the total credit investment should be compulsorily invested by 2085 BS.

Banks and financial institutions are required to compulsorily invest 15 percent of the total loan in small and medium enterprises and domestic enterprises that provide maximum employment and are directly related to the livelihood and income of the people. The central bank is trying to strengthen the economy by making these arrangements. In addition, the mobilization of financial resources is aimed at economic growth by making centralized financial resources accessible to all. The government has been implementing subsidized programs to contribute to the economy by expanding financial access. The resources of the financial sector have also been diverted to this.

Another thing that needs to be done in order to improve the economy is the digitalization of the financial sector. It is necessary to work by prioritizing digitalization to make the economy and financial sector transparent. Digital usage increases transparency and reduces the physical presence of the customers. The technology-based banking sector is also considered effective in terms of good governance as it is transparent in itself.

At a time when banks and financial institutions have been increasing their investment in the technology of the financial sector, there is a challenge to make it more systematic and secure. For this, banks and financial institutions should also increase investment. It will also help in controlling corruption to an extent. At the same time, it is imperative for the government to use the resources of the financial sector to build certain infrastructures that contribute to the economy.

} Regarding risk management, it is customary for banks and financial institutions to manage the operational risk, market risk, credit risk and cyber risk due to the increasing technology-friendly banking services in recent times. There are some shortcomings in terms of the preparedness of the banks and financial institutions in these risk management and how they have been working: {

Looking at the recent situation in the financial sector, the interest rate has come down to a low point. Banks and financial institutions have loans worth around Rs 11 trillion. Using this, the government can build some infrastructure through internal loans. If express highways and large hydropower projects can be completed with one’s own resources, it will accelerate the economy.

The economy can be developed by using the resources of the financial sector if we can implement directed loan programs in the sectors that act as the backbone of the economy, increase the use of digital use, and reduce the cost of services.

Currently, banks and financial institutions have sufficient liquidity. The interest rate on loans has also reached a low point. Banks also have enough capacity to lend money. The bank’s total capital fund is around 11 percent. This is a good sign for new investment. The banks and financial sectors will be happy in the coming days along with the economy if political stability is established after the elections are held on time.

Guru Prasad Poudel is the Executive Director of Nepal Rastra Bank.TAG_OPEN_strong_53

Nepal Society of Economic Journalists (SEJAN) from Economics

}