The number of special on-site inspections conducted in the year was 56 percent higher than in the previous year, shows an NRB report published in July 2012 -- the latest so far.[break]
Special on-site inspections are generally conducted based on request made by the Commission for Investigation of Abuse of Authority (CIAA), complaints filed by individuals, or based on news reports. Upon pursuing these requests, complaints and reports, the regulator usually stumbles upon cases of non-compliance or malpractices such as mismanagement or embezzlement of funds at banks and financial institutions.
Although the central bank did not reveal particular reason for rise in special on-site inspections in that year, they indicate growing operational risk faced by the banking sector.
Operational risk generally entails losses resulting from weak internal processes, questionable decision-making and unethical practices of staff members. Few examples of operational risk seen lately in the country’s banking sector are card and check frauds, haphazard extension of loans and involvement of board members and even high-ranking staff in fund embezzlement.
Take for example the debit card fraud case at Himalayan Bank in which millions of rupees were looted from accounts of customers and bank’s vault. This resulted from too much of trust laid on one staff -- former card department chief -- to handle various operations and failure to properly scrutinize his work.
Similar fraud case also took place at H&B Development Bank in which a branch manager was found colluding with fraudsters to issue good-for-payment checks despite knowing unavailability of funds in accounts. This not only cost millions of rupees to the bank but caused erosion in its share value by over 60 percent.
Lately, many banks and financial institutions are also bearing the brunt for issuing loans to the real estate sector in a haphazard manner as many borrowers have failed to pay back the debt on time. This has deteriorated asset quality of many banks and financial institutions and caused them to post lower profit or incur losses.
At the same time cases of involvement of bank’s promoters, board members and high-ranking officials in fund embezzlement are also making headlines, while many banks continue to face liquidity stress from time to time due to improper fund management.
“Yes, operational risks are becoming more visible in banks and financial institutions these days than in the past,” NIC Bank CEO Sashin Joshi told Republica. “This is because of weak internal control system and shortage of experienced human resources.”
Many banks and financial institutions do not have a system to scrutinize on-going operational risks that can be minimized by double checking, adopting four-eye principle and putting ceilings on transactions, according to Joshi. “These checks and balances, coupled with zero-tolerance policy on regulatory breaches, can control fraud cases,” Joshi further said. “So it’s basically about ensuring regulatory compliance. But investment in technology can also help.”
Since April 2008, when the Constituent Assembly elections were held, Nepali banking sector has grown enormously.
The number of commercial banks and development banks has risen to 32 and 90, respectively, from 25 and 58 in 2007/08. The number of microcredit development banks has also gone up from 12 to 25 in the same period.
The exception is in the case of finance companies -- number of which has declined from 78 in 2007/08 to 67 at present. But the reduction is largely because of mergers, which have made those institutions financially stronger than before.
Overall, the number of banks and financial institutions has risen from 173 five years ago to 214 at present. With this growth and rapid expansion of branches, total assets of banks and financial institutions have grown from Rs 699 billion in 2007/08 to around Rs 1.4 trillion at present.
This burgeoning banking sector, however, has failed to deliver quality because of limited supply of quality human resources. And this has made poaching a common practice in the banking sector, with many of those stolen staff getting promotions that they had never imagined of.
“Generally, bank staff members get promotion every three years. But with the shortage of human resources, many are moving bases to snap positions suitable for them after, say, five years,” Bhuvan Dahal, convenor of the finance committee of the Nepal Bankers’ Association, told Republica.
Because of this many branches of banks and financial institutions are being led by people who do not have sufficient experience.
“To enhance quality of human resources, banks and financial institutions should have focused on training,” said Joshi. “But not many are investing to enhance quality of human capital. That’s why there is dearth of skilled and knowledgeable human resources.”
This is the same in the case of board directors.
Generally it is the job of the board of directors to keep an eye on the management of banks and financial institutions. This entails looking over operational risks, credit risks that emerge from extension of loans, and market risks, such as threats that emanate from changes in interest rates, foreign exchange rates and share prices.
For this, board directors need to have sound banking knowledge and experience. But in Nepal’s case most of the directors, who are promoters, have little or no banking knowledge and experience.
In such case, a qualified board director from professionals’ quota could fill the void. However, many professional board directors in Nepal’s banks and financial institutions do not have sufficient banking experience and knowledge of banking norms, as many are former government officials or professors.
This gives leeway to other directors to wield influence and force the entire board of directors to compromise with corporate governance and compliance norms.
Amid this gloomy situation, there are hopes that the country’s banking sector may soon get qualified directors as first batch of senior bankers, who are currently working as CEOs, are about to retire.
“But to lure these people into the boardroom, the regulator must introduce provision of extending remuneration to professional board directors,” said Dahal, who is also the chief investment officer at Nabil Bank.
“The current practice of providing stipend is obsolete and will not generate interest among qualified people to do the hard work of keeping a sight over the bank’s management.”
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