ACTIONS AGAINST COMMERCIAL BANK AND FINANCIAL INSTITUTIONS BY NEPAL RASTRA BANK (NRB)

The central bank is the parental bank of the country. The whole financial operations of the entire nations are channelized under the supervision and control of the central bank. Nepal Rastra Bank is the central bank of Nepal. In order to maintain the favorable economic balance within the entire nation, Nepal Rastra bank plays a significant roles.  For more details regarding central bank of Nepal, I have written a separate blog. please refer to the following link : https://managementknowledges.blogspot.com/2016/12/nepal-rastra-bank-and-its-restricted.html.

Banks and financial institutions are given licence to benefit the people.They collect deposits from public and then lends the funds to the industries, factories, businessman and other customers. By doing so, the bank collects interests from the investments and then pays the interest to the depositors. The differences in interest becomes the income of banks. Similarly, the banks and financial institutions also helps its customer by paying the dues on time to the ordered party and collects commission for performing such activities. Banks also perform advisory function, agency function, brokerage functions, underwriting functions and many more. All of these are done for the welfare and development of the society.

However, sometimes banks and financial institutions forgets there basic objective and starts its business operations in the way which is unfavorable to the society. They starts following activities:

• Discriminating customers.

• Cooking books through overstating or understating the Assets and Liabilities.

• Starting unauthorized aligned business.

• Starts dominating the money and capital markets.

• Taking unusual commission.

• Charging unusual interests.

• Charging Unusual fines.

• By not maintaining the Maximum Permissible Banking Finance (MBPF) as per rules.

• By not maintaining sufficient capital as prescribed by the Nepal Rastra Bank.

• By not following the guidelines, provisions, by-laws, directives and Act of Nepal Rastra Bank and so on.

Therefore, being the controller of all the banks and financial institutions, Nepal Rastra Bank makes an eagle view upon the business operations of such banks and financial institutions. The central bank of Nepal not only supervises and controls but also takes a strict actions against such commercial banks and financial institutions. For more details regarding supervision and control of Nepal Rastra Bank of Nepal, i have written a separate blog. please refer to the following link. https://managementknowledges.blogspot.com/2017/01/supervision-and-control-of-nepal-rastra.html

So, I would like to share, the actions of Nepal Rastra Bank which are taken against commercial banks and financial institutions for malfunctioning the business operations and not following the provisions of Nepal Rastra Bank Act, guidelines, provisions, by-laws and directives of Nepal Rastra Bank - which is declared problematic. 

They are as follows:

• Prohibit or limit in collection of deposit, credit supply or investment.

• Prohibit any action carried out illegally by breaching the prevailing law and regulation of the bank that is against the interest of commercial bank or financial institution.

• Prohibit from doing some specific business among the businesses allowed to commercial bank or financial institution for specific time.

• Increase the paid capital by issuing new shares or by receiving due amount of issued capital.

• Suspend the right to vote or other rights of shareholder.

• Stop payment of dividend or any other amount to the shareholders to increase the capital.

• Determine limitation to the amount of bonus, salary, compensation and other expenses for the director and other high level management officials.

• Make necessary arrangement for the corporate governance, internal control and risk management of commercial bank or financial institution.

• Maintain sufficient capital and high proportion of liquidity or prohibit business transaction or determination of other necessary terms.

• Limit transaction of the commercial bank or financial institution or prohibit sale of property or expansion of branch office or close any domestic or international branch.

• Maintain necessary arrangement for reduction of risk of the properties which are materially doubtful or securities without proper evaluation or other properties.

• Receive prior approval of the bank for major capital expenditure, substantial commitments having major liabilities or for the expenditure of contingent liabilities.

• Issue order to remove from the post to single or more director or manager or employee as per the necessity.

• Nepal Rastra Bank can remove the director or manager or employee in case of not discharge of the order made, by respective commercial bank or financial institution.

• Suspend board of director of the commercial bank or financial institution and takeover the management of such commercial bank or financial institution in self control or operate the management and transaction of such commercial bank or financial institution by appointed official.

• Order commercial bank or financial institution, which is listed in Stock.

• Exchange for the application of de-listing.

• Prohibit payment of interest and principal for time bond auxiliary loan without having securities of commercial bank or financial institution.

• Take any other action as bank feels necessity and proper to stablize the economy.

Note:

• Here Appointed Official means any person, firm, company or organization appointed by the Nepal Rastra Bank for the management and operation of transaction of the commercial bank or financial institution.
• Generally, the order issued by the Nepal Rastra Bank remain valid for two years from the date of issue unless it is not renewed.

It will be the expenditure of the respective commercial bank or financial institution to bear all the expenses until - Nepal Rastra Bank takes the control of management of any commercial bank or financial institution and makes arrangement for the management and operation of transaction. 

In case, Nepal Rastra Bank controls any of the commercial bank or financial institution then:-

• The preliminary report
• Annual report 

- prepared by the bank or the officer appointed by the Nepal Rastra Bank is to be submitted to the government of Nepal.

In case of necessity the central bank can revoke or nullify its order issued by issuing another order.  However, Such order will contain the basis,reason and other necessary information regarding the need of issuing such order.

The directors, managers, or employees removed by the bank are not allowed to work or involve in transaction in the same commercial bank or financial institution as director, manager or employee or any other post of any commercial bank or financial institution either directly or indirectly. 

Similarly, the directors, managers, or employees removed by the bank under the suspended member of board of directors are not allowed to receive or claim any remuneration or compensation under the provision of prevailing law or agreement held directly or indirectly from the date of such order.

Determination of the capital and valuation of assets and liabilities of any
problematic commercial bank or financial institution shall be based on the basis, process and standard determined by the bank.

It is to be noted that, a reasonable opportunity of being heard is allowed while removing or suspending the directors, managers or employee of the commercial bank or financial institution from their post.  During the hearing of the action if,

such action does not seems reasonable then Nepal Rastra Bank can annul, change or make necessary decision to the order.

For more details regarding Nepal Rastra Bank, please read the following links:

• https://managementknowledges.blogspot.com/2016/12/money-banknote-and-coins.html
• https://managementknowledges.blogspot.com/2016/12/foreign-exchange-policy-regulation.html
• https://managementknowledges.blogspot.com/2016/12/financial-provisions-of-nepal-rastra.html

Picture Credit : startingahomebusiness.smallbizincubator.com

SUPERVISION AND CONTROL DONE BY NEPAL RASTRA BANK (NRB)

Nepal Rastra Bank is Banker's Bank. For more details regarding central bank of Nepal, i have written a separate blog. please refer to the following link : https://managementknowledges.blogspot.com/2016/12/nepal-rastra-bank-and-its-restricted.html.
It is the prime responsibility of this bank to maintain the harmonious relationships among different banks and financial institutions. For this, proper supervision and controls are required. 

If the Commercial Banks and financial institutions wants to conduct banking and financial transaction then they must obtain license from the central Bank in prescribed manner. While issuing such license the central Bank may fix necessary terms and conditions. Therefore, it is the duty of the licensed bank and financial institution to work within such terms and conditions.

In order to control the deposits and loan, prior approval of Nepal Rastra Bank is required for accepting any type of deposits from the concerned person, firm, company or institution. In this process the central bank may provide terms and conditions. Therefore, it will be the duty of the concerned person, firm, company or institution to abide such terms and conditions. For maintaining the price level, the central bank puts restriction on rate of interest time to time.

Regulatory Powers of Nepal Rastra Bank:

Nepal Rastra Bank has full power to regulate the functions and activities of commercial banks and financial institutions. For this purpose, the Bank frames rules and bye-laws, directives and circulars time to time. Therefore, it shall be the duty of the concerned commercial bank  and financial institution to follow such rules, bye-laws, order, directives and circular. 

For better supervision, the central bank orders other banks and financial institutions to submit the following particulars:-

• Balance sheet accounts.
• Off balance sheet commitments.
• statement of income and expenditures. 
• Ratio among accounts or items.
• Prohibitions, restrictions or conditions concerning specific types or forms of credit or investments, or of credit or investments.
• Forms of commitments of a risk-bearing nature which are not matching as to maturity of assets and liabilities and off-balance-sheet items
• Foreign currency, spot or advance rate of interest.
• Swap, option or similar instruments or access to the payments system through electronic or other means and
• Other particulars and documents  as deems appropriate. 

Nepal Rastra Bank regulate the commercial banks and financial institutions by mobilizing following powers:- 

• Enforcing authority and responsibility of licensing, supervising and regulating the commercial banks and financial institutions and revoking the license.

• Taking over or providing trusteeship to the commercial banks or financial institutions which have been declared insolvent or are on the verge of insolvency

• Investigating, supervising and inspecting the books and accounts, records, documents or register of commercial banks or financial institutions by any official of the Bank or the person designated by the Bank. This is done in order to find whether or not any commercial bank or financial institution has conducted business and transaction in accordance to Nepal Rastra Bank Act,the Rules, bye-laws, order or directive.

• Issuing order to the member of the Board of Directors, official or employee of any commercial bank or financial institution if inspection and supervision is required. 

Note:

• For better credit control, the central bank prescribes the time and amount limit to advance the credit to any commercial banks and financial institutions. 

• If this limit is not followed then, Nepal Rastra Bank fines an amount equal to the interest which a commercial bank or financial institution would have charged for the amount of credit not advanced or advanced less than the prescribed amount from the concerned commercial bank or financial institution.

• All the Commercial Bank and financial institution must furnish the particulars of its transaction and financial position to the Nepal Rastra Bank in the manner prescribed. This may be published with the particulars available if the central bank, if deems appropriate.

The prior approval of Nepal Rastra Bank is required in order to issue any debentures and financial instruments. This may be supported by terms and conditions. If it is so, then it shall be the duty of the concerned commercial bank and financial institution to abide by such terms and conditions.

Inspection and Supervision: 

• Nepal Rastra Bank frames and implements inspection and supervision by keeping an eye on international standards for all the banks and financial institutions. 

• The central Bank, at any time, inspect and supervise any of the offices of commercial banks or financial institutions. Such inspection and supervision is carried out by the deputed official of the Bank or an expert designated by the Bank at their office or demanding to submit detailed particulars and information to the Bank itself. 

• It is the duty of the Directors, officials or employees of such commercial bank and financial institution to submit the statement, data, record, information, particulars necessary for computer and auditing, and other documents to such official, expert or the Bank to review or to examine them within the time limit. 

• The official or expert submits the reports generally within fifteen days upon completion of his works to Nepal Rastra Bank. In case such report is not completed within fifteen days, the Governor of Nepal may extend the time limit for another fifteen days.

• The report submitted is to be presented on the next board meeting of Nepal Rastra bank.

• Then the Board may, after making appropriate decision on matters contained in the report submitted , issue appropriate directions to the Governor about the actions to be taken in the matter. Then, It becomes the responsibility of the Governor to implement or cause to implement such directions.

Note:

1`.For the exchange of mutual cooperation, the central bank may under its supervisory power, 

• Exchange cooperation with foreign supervisory authority on reciprocal basis or,
• Exchange notices or information with concerned foreign supervisory authority on reciprocal basis.

 For this, confidentiality of the information is to be maintained.

2. If any commercial bank or financial institution is in following situations:

• State to get liquidated
• State to get dissolved 
• State of being incapable to pay the debt or 
• State of being materially unable to discharge any or all of its liabilities

- then, such bank must inform to Nepal Rastra Bank for such unfavourable situation.This must be done within fifteen days.

On the basis of information received from any source, report of inspection or supervision, the central bank declares problems of the commercial banks and financial institutions by written notice to it. This is done if following things are found: 

• If any action which is against the interest of the depositors, shareholders, creditors, or general public is found.

• In case of non fulfillment of any financial liabilities.

• In case of not having probability to fulfill any financial liabilities.

•  In case of insolvency or going to fall under insolvency or facing material financial difficulties.

• In case of discredit or breach of the Nepal Rastra Bank Act, prevailing law related to bank and financial institution, other prevailing law, terms of license or regulation, directives or order of bank.

• In case the license obtained on the basis of submitting false, fraudulent, wrong document or data.

• In case of unable to maintain the capital fund as per this Act, prevailing law related to bank and financial institution and directives issued by the bank at time to time.

• In case of the initiation of the process of liquidation or insolvency of any commercial bank or financial institution under the prevailing law.

• In case of delay in the process of voluntary liquidation.

• For the commercial bank or financial institution established with foreign joint venture and such bank is in state of being insolvent or liquidator is appointed for the liquidation or the license of such commercial bank or financial institution is terminated under the provision of the law of respective country or transaction is banned either full or partial.

•  If the bank is convinced that commercial bank or financial institution is unable to pay it’s due or can make negative effect in its liability or duties, which it has to perform.

Picture Credit : nvwsolutions.co.uk