NRB governorship
Yuba Raj Khatiwada has earned his spurs during his five years as Nepal Rastra Bank governor. Bold yet pragmatic, he has instituted a slew of reforms to strengthen our financial system. Over the last few years, over-exposure of our Banks and Financial Institutions (BFIs) to real estate threatened a crisis like the 2007-08 global recession, when highly-leveraged BFIs in the West were on the verge of collapse after their real estate loans soured. Khatiwada must be credited for tightening the screws on our BFIs on time. In 2012, he made 'stress test' (basically a test of whether banks can cope with sudden losses) mandatory for all BFIs mobilizing two billion rupees in deposits. In the same year, the maximum maturity period of interbank transaction was brought down to seven days. Long inter-bank lending periods, it has been observed, allows bank CEOs and promoters to game the system for their personal benefit, which is the reason international inter-bank lending period is usually no more than a day.
Another vital reform during Khatiwada's tenure was guarantee of individual deposits of up to Rs 300,000. Before Khatiwada, if a bank for some reason went bust, there was a risk that its common depositors would not be compensated. Likewise, the provisions to limit institutional deposits to 60 percent of all deposits and to make a clear demarcation between bankers and entrepreneurs/businessmen have also contributed to the stability of BFIs, and by extension, the national economy. Khatiwada, who is thought to be close to CPN-UML, was able to stay above political fray and leave behind a strong personal imprint on NRB.
More than just shoes
That is no small task in the central bank which is notorious for its fractious union politics that has stymied reform initiatives of many previous governors. Now that Khatiwada is retiring on Thursday, the task is cut out for his successor. Work-wise, the new governor's biggest challenge will be to make Nepali financial system compatible with the rest of the world.
For the last few years NRB has been consistently saying that Basel-III principles will be 'gradually implemented' in Nepal. Basel-III, among other things, provisions for periodic stress testing of BFIs, based on measures like their capital adequacy and liquidity. But Nepal continues to rely on the outdated Basel-II, whose inadequate provisions had contributed to the 2007-08 global crisis. Many of our banks are undercapitalized and rely on dodgy accounting to manufacture profit. Basel-III would put a stop to this.
The central bank has said that beginning this year it will fully implement the International Financial Reporting Standards (IFRS), another crucial benchmark of transparency. It will be up to the new governor to implement Basel-III and IFRS. But his (and it will be a he) biggest test will be on the political front. Khatiwada had both strength of character and necessary political capital to push through vital measures, battling the obstreperous unions every step of the way. He also successfully withstood the pressure from various mafias active in our banking sector who have been trying to roll back even limited reforms. The governorship of NRB demands an extremely nuanced set of political, managerial and policymaking skills. We would be lucky to have another one like Khatiwada.
