Analysis
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KATHMANDU, March 27: When Chiranjibi Nepal took the reins of central bank last week, he inherited a mixed bag of challenges and opportunities from his predecessor Yubaraj Khatiwada. By initiating series of reforms measures in the banking sector, Khatiwada has made things easier for the new governor to a large extent. The new governor will be tested for his ability to continue reform measures, if not initiate further reforms, started by his predecessor
Khatiwada deserves credit for driving the financial system into a right direction which was otherwise at the cusp of vulnerability due to haphazard lending practices in the bank and financial institutions (BFIs), over-exposure of banks and financial institutions (BFIs) to risky sectors like real estate and share market, question of financial stability and threat of being blacklisted by the Financial Action Task Force due to deficiencies in framing laws to fight anti-money laundering, among myriad of other problems.
Fixing interest rate spread at five percent, making it mandatory for BFIs to lend certain percent of their total lending to the deprived and productive sector, and barring BFIs from levying various service charges on clients were some of the notable policies that the NRB introduced during Khatiwada's tenure.
"BFIs must invest certain proportion of their resources into areas like agriculture, hydropower, tourism and small and medium industries because these sectors account for about half of the economy. Banks' investment in agriculture and hydropower stands at just three percent. We had set the directives to mitigate this challenge, but the mission has not been achieved yet," former governor Khatiwada told Republica.
The banking industry observed series of merger and acquisitions (M&A) in the last five, thanks to the policy adopted by the NRB to encourage BFIs to pursue mergers and acquisitions for capital consolidation. Nearly three dozen BFIs underwent merger and acquisitions after the policy was introduced.
Khatiwada intensified eff-orts to bring perpetrators of financial crimes to the book during his term. As a result of his efforts to maintain financial discipline, many of such white-collar crimes are being tried at the court. Many such perpetrators are already behind the bars.
"The morale of criminals went down significantly after former governor Khatiwada spearheaded a campaign to wipe out financial crimes from the banking system. He became successful in this front to a large extent," a senior official of NRB told Republica. "The situation has improved a lot. Gone are the days when criminals with political backing used to enter inside the office of a deputy governor to manhandle him."
Talking to Republica last week, Khatiwada recalled how he rejected pressure from various leaders and political parties while pursuing banking fraud cases against some top bankers. "I easily said 'No' to undue political pressure during my tenure," he had said.
This is where the new governor's biggest challenge lies. As Governor Nepal, who was economic advisor to Prime Minister Sushil Koirala, is close to Nepali Congress (NC), he will have hard time resisting pressure coming from the party. However, Nepal, while assuming office last Thursday, said that he would put national interest first. While he is expected to take off his political hat during his tenure in NRB like he did when he was leading Securities Board of Nepal (Sebon) -- the stock market regulator -- some years ago, it is yet to be seen whether he puts national interest over his political ambition or not.
"The new governor has assumed the office at a time when the microeconomic indicators are in the positive side and financial system is moving in a system. His predecessors have set the stage and made things easier for him to begin with. Now is the time for him to swing into action by shunning political pressure," the senior official of NRB said.
