BFI directors, CEOs barred from serving more than two terms in a row

BFI directors, CEOs barred from serving more than two terms in a row

Jul 18, 2014-

Nepal Rastra Bank (NRB) on Friday unveiled the monetary policy for 2014-15, barring banks and financial institutions’ (BFIs) directors and chief executive officers from serving more than two consecutive terms.

The policy stated corporate governance in BFIs, where chairmen, directors and CEOs served for a longer term, remained weaker. It said such BFIs could not protect the interests of depositors.

Therefore, the central bank told the BFIs to put in place a provision within this fiscal year that chairmen, directors and CEOs shall not be elected or appointed to the posts for more than two consecutive terms.

The central bank is mulling adopting a provision, under which the existing terms of the BFI executives will be considered first, NRB Governor Yuba Raj Khatiwada said. This means the executives can serve for one more term.

The governor, who has long been insisting there should be a separation between bankers and borrowers (businessmen), also made a provision that BFI directors and CEOs cannot take loans from other BFIs for companies in which they own a majority stake.

“The message is clear that they should either be a banker or a borrower,” said an NRB official.

Currently, the directors and CEOs are allowed to take loans for real estate (up to Rs 10 million) and hire purchase, but the companies they have promoted can borrow any amount.

In the monetary policy, the central bank also provisioned that a person having a certain percentage of shares in a BFI cannot hold the position of a CEO at the same BFI. The NRB, however, said the actual share percentage would be set through a directive. “A logical portion of shareholding, which would not invite conflict of interest, will be fixed,” said Khatiwada.

BFIs failing to meet the minimum paid-up capital requirement at the end of mid-July 2014 will be banned from expanding branches, distribute cash dividends, and their lending and deposit mobilisation will be limited to a certain level, according to the policy.

The monetary policy, which primarily aims at controlling inflation and addressing surplus liquidity in banks, has taken another “tougher policy”, discouraging increased cash flow in the market. For the purpose, it has hiked the cash reserve ratio (CRR) by 1 percentage point to 6 percent for commercial banks, 0.5 percentage points to 5 percent for development banks. The policy, however, kept the CRR on hold for finance companies.

Usually, liberal policies are adopted to support economic growth enabling the private sector to get loans at lower interest rates. However, the main reason behind taking tougher policies are lending has not grown sufficiently despite availability of liquidity at cheaper rates and inflation is still around double digits, NRB officials said.

The government aims to attain 6 percent growth this fiscal year. The governor said although the supply side has also emerged as a big contributor to inflation, the policy’s focus is primarily on controlling demand. NRB aims at maintaining money supply growth at 16 percent.

Other targets of the policy are increasing credit to the productive sector, maintaining financial stability and increasing people’s access to financial services.

With the government announcing in the budget that youths will be ensured agriculture loans at not more than 6 percent interest, the central bank said it will make necessary provisions to implement the budgetary announcement. “If necessary, NRB will provide refinancing facility for this purpose,” states the policy.

The central bank has brought down the interest rate of refinancing for agriculture, hydropower, livestock and fishery to 4 percent from 5 percent.

With the banking sector facing excess liquidity problem for more than a year, NRB has opened two new windows to mop up the liquidity from the market—purchasing deposits of BFIs through auction and issuing Nepal Rastra Bank bonds. NRB has so far been adopting reverse repo and outright sales to absorb excess liquidity.

With bankers complaining about short periods of reverse repo (seven days), the central bank has also introduced repo and reverse repo with a maximum expiry date of six months.

The central bank also allowed banks to invest up to 40 percent of their foreign currency deposits in call deposits, certificates of deposits and other secure debt instruments in foreign countries.

The policy has talked about amending the Act on prohibiting abroad investment. According to a senior NRB official, the move aims at creating a space for foreign investment in the changed context.

People will get up to $10,000 while travelling abroad for medical treatment, according to the policy. The central bank will also ease debit and credit card issuance provision to make online payments easier, and allow online purchases worth up to $2,000.

The policy has also hiked the maximum limit of foreign exchange given to traders through drafts and TTs for importing goods from countries other than India through the medium of draft to $35,000 from existing $30,000.

Although NRB has been promoting micro-finance institutions (MFIs) to ensure increased access of the rural people to financial services, the new monetary policy has imposed restriction on MFIs seeking to operate in areas where there is heavy presence of BFIs.

The central bank said any “D” class financial institution established in districts other than the fixed unbanked districts will have to increase their paid-up capital from 2014-15.

With bankers complaining about duplication of loans due low absorption capacity of borrowers from MFIs, the central bank kept the percentage of the deprived sector lending intact. As per its initial plan, it should have been increased by 0.5 percentage points this fiscal year.

“Considering the huge role played by ‘D’ class financial institutions in poverty reduction, we should not give up deprived sector lending,” said Khatiwada. “But we will address the anomalies in the sector and strengthen the credit information system.”

Monetary Policy 2014-15

-    BFI directors, CEOs barred from taking loans for companies in which they hold majority stake

-     Cash Reserve Ratio hiked

-     Act on foreign investment to be amended

-    Repo, reverse repo with up to six-month expiry

-    NRB bonds to be issued

-    MFIs willing to operate in banked areas have to increase paid-up capital

-    Deprived sector lending unchanged

-    Tougher measures against margin loans

Published: 19-07-2014 09:29

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