Thus spake the regulator: Self-regulation is rarely seen or exercised in Nepali banks and financial institutions

KATHMANDU, APR 27 -

The current situation of Nepal’s financial sector is highly challenging for players and the regulator alike. The first and foremost challenge is establishing financial stability through public confidence. It is also the basic objective of any central bank. However, even advanced and sophisticated regulatory mechanisms have at times failed to work.

There are four challenges to Nepal’s financial stability—number, corporate practice, credit portfolio and slump in the real sector.

The proliferation of banks and financial institutions would be good to the system and beneficial to customers if their services were competitive in a healthy manner. But when they start behaving in an unhealthy manner, it will bring disaster to the financial system. The Nepali financial sector has been characterised by unhealthy practices in terms of human resource mobilisation, customer swapping, pricing and risk compromise. This type of unhealthy competition has always been counterproductive to the financial system. Corporate practices in Nepali banking have also always been a matter of concern to the regulators. Barring a few exceptions, self-regulation in financial institutions is rarely seen or exercised. Self-regulation is the key for any institution that has a fiduciary duty.

Exposure to real estate and lending against shares have become a matter of concern to banks and FIs these days. Though such exposure is not that huge, it may block cash flows and the credit creation cycle in the system. Without the support of the real sector, the financial sector alone cannot continue in the long run. However, the performance of the real sector has been disappointing for the last few years, and it will have a direct impact on the financial sector. The financial sector needs to handle this challenge in a planned manner.

Real estate lending and the overall economic condition will impact the performance of the financial sector and may reduce the profits of most financial institutions. However, institutions with a sustainable customer base, having proper risk management practices and adequate provisioning will continue to enjoy good profits.

NRB has a crucial role to play when it comes to ensuring a sound financial system. NRB’s regulations are at par with the best international practices. However, enforcement of such regulations also depends on the market response to them. NRB’s efforts are directed at educating the board and senior management of financial institutions about proper governance. There are corporate governance-related regulations in place, and our efforts would be to improve them as needed.

The central bank’s policy regarding issuing licenses is quite clear. There is a moratorium on licensing. At the same time, licenses to open micro finance is are being issued to improve access to finance. This is an indication that we encourage FIs in rural and remote areas where the people are under-banked. Our approach to the banking sector is to improve risk management practices. Where risk is compromised, NRB has prompt corrective measures. We enforce regulations based on international best practices and they may be changed as per market behaviour.

The objective of the Nepali banking sector is to bank for the nation’s economic development. The policy adopted through the current monetary policy to go to rural areas is a good start. Banks are starting to open branches in rural areas which in the long run will have a substantial benefit for the economy. I believe this will also improve allocation of banking resources in a phased manner. Yes, we need to have a big push for development; but at the same time, we need to allocate banking resources to the deprived or targeted areas to promote income generation and self-employment.
by MAHA PRASAD ADHIKARI

(Adhikari is deputy governor of the NRB)

Posted on: 2011-04-27 08:51
, http://www.ekantipur.com/2011/04/27/business/thus-spake-the-regulator/333144.html