BFI regulations
Our Banks and Financial Institutions (BFIs) seem to be a law unto themselves, openly flouting central bank directives, cheating their customers and bullying those who default on their loans. Last month, the Nepal Rastra Bank (NRB) had expressed its concern over the huge increment in banks’ lending rates without corresponding increases in retail deposit rates. This, in NRB’s view, is a case of ‘interest rate distortion’. The central bank had also chided the banks for the ‘unfair practices’ they engage in while trying to keep their core-capital-cum-deposit (CCD) ratio within NRB limits. Now, the central bank has had to once again step in and instruct the BFIs to recover their defaulted loans in a dignified manner. This directive came as the commercial banks started treating defaulters as criminals, all of whom were deemed to have defaulted with mala fide intents. The collaterals of such borrowers would be seized and arbitrarily sold off, without proper assessment of their worth and without considering the sentimental value of such collaterals for their owners. There are other areas where the BFIs are erring.
Many banks are owned by businessmen, creating a direct conflict of interest between their two lines of work. In that case, if a bank increases interest rates on its loans, as is happening now, the concerned bankers make a direct profit. But should the loan interest rates go down, say, to meet
regulatory requirements, even in that case the bankers stand to gain by directing loans to their other businesses. This is why it is a global practice to separate banking from other businesses. But not in Nepal. Here the bankers have been able to successfully lobby parliamentarians, through fair and foul means, not to separate the two sectors. Retail depositors and borrowers as a result suffer. Even while the banks have jacked up their loan interest rates, they continue to hold down the rates for retail deposits, in clear violation of the central bank’s mandatory interest rate spread provision. So even as businessmen, who often double as bankers, are making hefty profits for themselves, the deposits of common folks continually depreciate in value due to persistent, double-digit inflation.
Small potential borrowers are also being priced out of the loan market.
Banks cannot be compared with any other business. If other businesses go wrong, only their investors are affected. But if a bank fails, it sends shockwaves through the economy and directly affects the health and wellbeing of hundreds of thousands of its depositors. This is why the central bank closely supervises them. But the NRB alone has been able to do little since the bankers in Nepal not only have fat pockets; they also have strong political connections. This means that they can easily thwart even commonsensical reforms. Even so, a strong central bank head, like its former governor Yubaraj Khatiwada, is still able to push through their reform measures. But in the absence of such a strong-headed and competent governor like Khatiwada, vested interests have been able to game the system to their benefit. They must be thwarted. The kind of conflict of interest that is prevalent in our banking system is ultimately a threat to the whole economy.
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