This unfortunate scenario, which unfolded in the Nepali banking sector for the first time, has taught three crucial lessons to Nepalis. First, depositors must choose their bank carefully. They must know that the onus of protecting their savings rests on themselves. The belief that the bank will safeguard money deposited in its accounts is merely a myth. Hence, depositors must always inquire about the financial health of the bank and study its management and governance practices before engaging with it.
Secondly, general investors must also study the financial and governance status of the company while buying shares be it from initial public offering or from the secondary market. People tend to believe that money invested in shares, particularly in banks, will never go waste. The case of NDB has proved otherwise.
Third – and the most crucial message – is that banks and financial institutions, like every other business, can also collapse despite regulatory efforts. But this is something that the central bank must try to correct. Nepal Rastra Bank (NRB) must revisit the efforts it made to revive the troubled NDB, accept its weaknesses and enhance capacity to intervene on time. Most importantly, it must find an answer to how it can enforce prudential norms and reforms if the management resists.
Unsuspecting depositors must not be forced to pay the price for loopholes present in the system. And this is where the issue of judicial reforms comes to the fore. NRB, keeping in view the poor management and financial health of NDB, had restricted the bank from collecting deposits from July 8, 2004. It had also instructed the bank to remove promoter Uttam Pun from the post of executive chairman for flouting prudential norms. However, the Appellate Court vacated restrictions that NRB had imposed. The Supreme Court too upheld the Appellate Court’s decision forcing NRB to step back, thus freeing the bank from the need to follow prudential norms. Had there been a special financial bench, which could have taken note of the rationale behind NRB action, the fate of the bank would have been different today. Rai would not have needed to shed tears in front of NRB officials to get her money back.
Related story
Unlearning how children learn
