Ensure Financial Discipline

A well-functioning financial sector is central to a market economy. It helps managing financial risks, boosting investors' confidence and fuels economic growth. Banking, as a dominant sub-sector of the financial sector, has to play a crucial role for the smooth operation of the modern economy. The function of bank is not only limited to the collection of deposits and supply of credits, it has to do many other functions to assist the growing digital economy. Therefore, a sound and vibrant banking sector is key for the growth and stability of the economy. To ensure the sound functioning of the banking sector, the central bank and the regulatory bodies minutely oversee the activities of the sector and its players. Prompt actions are taken if any banking institution is found not abiding by various laws, regulations and standards. 

Nepal Rastra Bank oversees the overall situation of the banking sector and regulates the bank and financial institutions (BFIs) involved in ensuring the stability and growth of the sector. As a regulator, responsibility of the NRB is to ensure the safety of deposits of public which is the major source of fund mobilised by the banking sector. During the supervision, when the central bank smells a rat on the safety of public deposits, it takes prompt corrective actions to the respective BFIs. In the past, NRB had taken such actions to save banks including Nepal Bank Limited, Vibor Bikas Bank from going bankrupt.

Recently, realising the threat to the deposits of the public kept in Karnali Development Bank (KDBL), the NRB has taken its management into its hand, declaring it a crisis-ridden institution. According to a news report published in this daily, the central bank identified several critical issues that led to this decision. Karnali Development Bank failed to maintain the required capital adequacy ratio, and its non-performing loan ratio that has reached an alarming 40.85 per cent. The institution faced a severe liquidity crisis, leaving it unable to fulfill its obligations to the depositors.

The NRB has also suspected the financial embezzlement and highlighted the weak governance structure of the bank. The central bank has informed that the KDBL was declared a 'troubled institution' under Section 86(b) of the Nepal Rastra Bank Act, 2058. The board of directors of NRB Wednesday made a decision to this effect. The NRB has formed a three-member management team led by Deputy Director of the central bank's Banks and Financial Institutions Regulation Department, Tikaram Khatri, including Deputy Directors Bishnu Kumar Bishwokarma of Financial Institutions Supervision Department and Jugal Kishor Kushwaha of Legal Department, to oversee the operations of KDBL. 

The NRB management team has assumed its responsibilities from Thursday. The central bank has authorized it to manage the institution's board, special general meetings, and other functions under the NRB Act, the Banks and Financial Institutions Act (BAFIA), and other applicable laws. The primary focus of the team will be to protect public interests by prioritising deposit payments and loan recovery. Additionally, the team has been tasked with conducting due diligence audits, investigating financial irregularities, and initiating legal action as required. 

The problem of the KDBL seems to have originated from the lack of financial discipline of the institution and its poor corporate governance. At a time when the entire banking sector is facing the problem of increased non-performing loans due to the stagnant economy, the central bank needs to stay alerts to check such problems roiling the sector they can erode public trust in the banking sector.