the problem of governance is rampant in development banks and finance companies

KATHMANDU, APR 27 -

Until Nepal Development Bank (NDB) was sent into liquidation in 2009, it was thought that financial institutions were perfectly secure; and that even if they were to get into serious trouble, the central bank would bail them out.

When NDB went bankrupt, it was a rude awakening for the public. The episode also marked the beginning of a new belief that banks with weak corporate governance and financial health should be allowed to fail so that others learn a lesson.

Since 2009, the central bank has initiated liquidation of another financial institution, Samjhana Finance. It has also declared two development banks as being crisis-ridden, Gurkha Development Bank and United Development Bank of Bara. Likewise, a string of scandals appeared at Public Development Bank, Madhyamanchal Grameen Bikas Bank and Nepal Sri Lanka Merchant Bank that was recently merged with Nepal Bangladesh Bank.

All these financial institutions had one thing in common—bad corporate governance. In all these cases, the promoters were found to have influenced or twisted banking norms and been involved in insider lending. They had also not allowed management to work professionally. “The problem began with the easy licensing of banks and financial institutions (BFIs) that allowed anybody with a lot of money to open a BFI,” said a senior Nepal Rastra Bank (NRB) official. “They think the banks are their own.”

In case of Gurkha Development Bank, several of its promoters had borrowed around Rs 500 million through third parties. “Insider lending has been a big issue for corporate governance,” said Maha Prasad Adhikari, NRB deputy governor. “There is a tendency of taking loans from each other’s bank.”

In Samjhana’s case, the directors were not only involved in insider lending, they were also hiding accounts of certain transactions.

There is a tendency of creating unnecessary sub-committees under the board of directors. Usually, there should be three sub-committees such as an audit committee to look into the transparency of transactions, a risk management committee and a compensation committee. “But directors form unnecessary sub-committees under them such as credit committees and recovery committees to exercise executive power and dictate to the chief executive,” said Adhikari.

The central bank last year was close to taking over the management of Sunrise Bank when two groups each led by chairman Tolaram Dugar and director Shrawan Goyal quarrelled to appoint the company secretary and the professional director of their choice. Both sides had also been seeking a role in the board’s different sub-committees. Following a strong warning from NRB, they decided to patch up.

The greed of bank promoters is such that in some banks, they have even been appointed to the sub-committees that usually remain under the board members, according to a senior NRB official. “This is also due to lack of awareness among the promoters about the banking culture,” said the NRB official. However, awareness has been growing among directors and promoters about the need for regulatory compliance. NRB officials admit the problem of governance is rampant in development banks and finance companies.

Rastriya Banijya Bank, Nepal Bank Limited, Lumbini Bank and Nepal Bangladesh Bank are the commercial banks that were taken over by NRB because of their bad financial situation due to bad governance. These commercial banks are now in a safe position although issues of governance still exist. “Now the people are so sensitive that if any bank gets into trouble, it may invite a systemic disaster in the banking sector,” said Nepal Bankers’ Association Vice-President Rajan Singh Bhandari.

The central bank has been blamed for not taking timely action against troubled BFIs. Its board has not been as active as it should be to take action against those involved in sinking BFIs. “We had to labour hard to declare NDB a crisis-ridden bank as a majority of NRB’s directors were against the proposal,” said a former director of NRB.

According to NRB officials, there is a tendency among bankers to influence the central bank’s board members to decide in their favour. “Many BFIs have been opened through the kindness of NRB directors although they failed to meet the essential prerequisites,” said a senior NRB official.



by PRITHVI MAN SHRESTHA, Posted on: 2011-04-27 08:52

http://www.ekantipur.com/2011/04/27/business/where-are-the-overseers/333145.html