The NRB Act (Amendment) Bill, which was registered it the parliament last week, will authorize the central regulatory bank to take troubled BFIs into 'resolution process' if it is convinced that the BFI concerned is unable to settle its liabilities despite central bank's other corrective and curative measures.
The proposed measures are in line with the recommendations made by The World Bank and International Monetary Fund IMF).
An IMF staff mission, led by Alexander Pitt, had recommended, in April last year, that the new central bank act should give NRB the power to scrap license of any BFIs or liquidate them without entering into court's proceedings.
"The central regulatory bank gives the license to the banks to operate and it supervises them to check that the things are going properly. If things are not going properly, it needs to issue sanctions to fix those problems. And, ultimately, if the banks are not responding, the central bank should close that bank," Paul Mathieu, advisor at Immediate Office of Monetary and Capital Markets Department of the IMF, had told media persons during briefing held at NRB office then.
According to NRB officials, the proposed provisions, if endorsed by the parliament unchanged, will authorize the central regulatory bank to form a 'Special Administrative Group' which will take over troubled BFI and complete 'financial liquidation' before forwarding the case to the court for 'final legal liquidation'.
Officials say that the 'resolution process' of troubled BFI is intended to facilitate the judicial body, or the court, to liquidate the troubled BFI. "Following the experiences of lengthy and complicated judicial process for the liquidation of troubled BFI, we have proposed the provision of the resolution, which will cut the works of the court short and make liquidation process simpler, in the upcoming law," said NRB Spokesperson Min Bahadur Shrestha.
At present, NRB will have to file a case at the Appellate Court if the central bank is convinced that the troubled institution was not in position to discharge its liabilities despite reformative and corrective action. Once the case lands into the court, it starts its own process for the liquidation. "The court appoints its own investigative officer to decide whether to take the liquidation process ahead or not. The investigative officer may not come up with the recommendation in line with the NRB. The new arrangement will overcome this shortcoming," an NRB official told Republica.
The bill also lays out the resolution process of troubled BFI. According to the proposed provision, a 'Special Administrative Group (SAG)' will be formed by NRB to complete the resolution process. The group will be primarily responsible for making payment of the liabilities on 'prioritization basis' as stated by the bill. "What we have seen during the liquidation process of some troubled BFIs is the complication and lengthy process in the court. The depositors, investors or other stakeholders could not have incurred heavy loss if the liquidation process was completed within a short span of time," Shrestha said, adding, "This resolution process will overcome all these shortcomings."
According to the bill, the law allows the SAG to take over the management or the board of the troubled BFI, manage assets and liabilities of the BFI including its subsidiary companies, issue, transfer or sell securities of troubled BFIs, carry out regular operations of BFIs, except deposit and loan mobilization, and assess, verify and settle liabilities of the institution, among others.
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