The integrity of financial institutions is critically important for the economic stability of any country. In Nepal, where commercial banks play a critical role in the nation's financial infrastructure, the importance of ensuring adherence to good governance practices cannot be underestimated. Recent findings from the Nepal Rastra Bank (NRB) in its 'Bank Supervision Report 2022/23' have raised significant concerns about the operational and systemic integrity of these institutions. The report unveils a troubling picture of the banking landscape, characterized by widespread non-compliance with established governance practices. Issues range from inadequate risk management systems and lack of essential policy implementations, such as Recovery Planning and Compliance Policies, to failures in maintaining a robust Management Information System (MIS). These deficiencies not only jeopardize the banks' own financial health but also pose serious risks to the broader macroeconomic stability of the country.
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According to the NRB’s findings, many commercial banks have engaged in questionable lending practices, such as issuing personal loans above Rs 5 million without clear purposes, directly contravening NRB’s Unified Directives. There are also instances where banks have failed to properly assess borrowers' needs, leading to over financing and non-compliance with debt equity ratios. The mismanagement extends to the renewal of customer loans without securing necessary documentation, and discrepancies in reporting loan exposures are alarmingly prevalent. One of the most glaring revelations is the lack of rigor in board meetings, where insufficient time is allocated to discussions on compliance, audit and risk management. This NRB finding suggests a systemic undervaluing of strategic governance frameworks, which is compounded by the boards’ inadequate follow-up on the implementation of prior decisions. These findings underscore a critical need for the NRB to intensify its regulatory oversight.
Currently, annual investigations into the operations of Class ‘A’ financial institutions are clearly not sufficient to ensure compliance and safeguard the banking system against potential crises. There is a strong case for the NRB to implement more frequent on-site inspections, which would enable real-time assessments and quicker rectifications of non-compliant practices. Increased regulatory scrutiny should be complemented by punitive measures for non-compliance to serve as a deterrent against governance lapses. The NRB must also ensure that banks are not only revising their existing policies but are also effectively implementing new governance frameworks as required. This may include the establishment of a sophisticated video surveillance setup along with an upgradation of technology to aid in the detection and prevention of fraudulent activities, as noted deficiencies in current systems compromise the ability to monitor and report suspicious transactions effectively. Additionally, the banks themselves must recognize that good governance is not just a regulatory requirement but a cornerstone of their long-term operational health. Investing in robust internal controls and compliance frameworks is essential. The onus lies with the NRB, as the sector's regulator, to lead this change. By increasing the frequency and depth of on-site examinations and holding banks accountable for their governance, the NRB can play a crucial role in promoting good governance practices in the banking sector.
