Nepal Rastra Bank (NRB) last Friday came up with a set of directives, called the Unified Directives, barring banks and financial institutions from extending loans other than education, home and hire purchase, to board members, chief executives and management-level staff of any other bank and financial institution (BFI). [break]The directive has also instructed BFIs not to renew such loans at the appropriate time.
Although chief executives and management-level staff are not worried by the instruction, board members are totally vexed as most of them are involved in a range of business activities and need to acquire different types of loans frequently for business purpose.
“The directive directly infringes on the fundamental rights of people to acquire loans lawfully,” a leading banker told Republica on condition of anonymity, adding the central bank should not “go on introducing laws arbitrarily without holding proper discussion with stakeholders of the banking sector.”
One of the reasons why most of the board members of BFIs are critical of the central bank is that most of these individuals are businesspeople involved in range of business activities other than operating a bank or financial institution. Since many of these people have acquired personal loans to run their businesses, they have found themselves cornered by the central bank instruction.
One way to escape this predicament is by acquiring corporate loans, as the central bank directive does not bar board members from getting such loans. But the dilemma here does not seem to be related with this. It is rather about paying off old debt as the regulator´s directive does not allow renewal of such loans.
“Some of these board members and even some CEOs owe millions of rupees to banks and most of these loans are personal. Now they are wondering how to pay the due amounts,” another banker told Republica on condition of anonymity.
NRB has a clear stance on what is now being called a “predicament”: “Those running banks should not be involved in other businesses, as these individuals have continued to use their influence to acquire loans from other institutions even for purpose of speculation. This puts depositors´ money at risk.”
“We have often come across instances of same businessman approaching us as a property dealer in times of crisis in the real estate sector and the same businessman wearing the garb of a banker in times when the banking sector faces problems,” said a high-ranking central bank official on condition of anonymity. “This practice of keeping dual identity should end in the banking sector as problems created by them not only affect one or two business sectors but the entire economy.”
Sanjib Subba, CEO of National Banking Training Institute, also agrees with views of Nepal Rastra Bank. “Albeit late, the central bank has moved to clean up the banking sector,” he said, blaming the regulator in the first place for creating the mess by allowing the borrowing community to open banks and letting them become directors.
“Let´s hope the latest measure will address problems related to conflict of interest and promote good governance,” he said.
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