Nepal Rastra Bank Imposes Micro-Management on Banks, Sparking Debate

Kathmandu. The issue of the regulatory body micromanaging banks and financial institutions has been raised since the past. Although the board of directors of banks and financial institutions is an institution with independent existence by law, bankers have been complaining that the central bank interferes in every action it takes.

They have been demanding that the regulator should provide guidance only on basic matters and grant autonomy in other matters, but in the last week, the Nepal Rastra Bank has sparked a new debate on micromanagement in the banking sector with one directive and standard after another.

The arrangements brought by the central bank from Asar 3 to 5 regarding the service conditions of bank employees, personal asset details of directors and CEOs, and CEO remuneration have further curtailed the decision-making authority of bankers.

New Standards on Overtime and Benefits Through Employee Regulations

On Asar 3, the central bank published the 'Draft Model Regulations for Employees of Banks and Financial Institutions', proposing very strict and binding provisions for the rights of employees. Amidst growing complaints that bank employees are overworked and deprived of leave and benefits, the central bank has intervened in this matter.

According to the proposed draft, employees will now have to be paid 1.5 times their normal salary for overtime on regular days and 2 times on public holidays. Not only this, but overtime is limited to a maximum of 24 hours per week, and compensatory leave must be given if more than 6 hours of work is done.

The draft also includes a whistleblowing system to protect the identity of employees who expose fraud and irregularities within the bank. Furthermore, the provision for mandatory codes of conduct and a monitoring subcommittee for the prevention of sexual harassment shows the direct presence of the central bank in the internal administration of banks. The provision that contract or daily wage employees cannot be hired for core functions will certainly impact the operating costs of banks.

Scanning Directors' and CEOs' Assets

On Asar 4, the central bank issued another strict directive, initiating strict monitoring of the personal details of bank directors, CEOs, and high-level management officials. Amending the consolidated directive, the central bank has now made it mandatory to obtain 10 points of detailed information when appointing or nominating officials, and this information must also be submitted to the central bank.

Under the new arrangement, directors and CEOs will now have to submit not only their family details but also information about assets held outside Nepal, details of any criminal or civil cases, a self-declaration of whether they have been blacklisted by the Credit Information Center, and details of outstanding government dues.

More importantly, a mandatory provision has been made to identify the beneficial owners of any institutional or foreign investment in the bank. This indicates that the central bank has deep suspicions regarding the transparency of bank founders and foreign investors.

Curbing CEO Salaries and Controlling Performance

The 'Guideline on Salary, Allowances, and Other Benefits of Chief Executive Officers of Banks and Financial Institutions, 2083', issued on Asar 5, has directly curbed the lavish benefits and remuneration of CEOs.

Now, two criteria have been set for determining the salary of commercial bank CEOs. First, a maximum of 2 percent of the average employee expenses of the past 3 financial years, and second, a maximum of 0.015 percent of the total assets of the last financial year.

This limit has been set at 3 percent of average employee expenses or 0.020 percent of total assets for development banks. For microfinance institutions, the limit is up to 0.050 percent of total assets. In addition, performance-based remuneration has been made very strict.

Now, bonuses or benefits given based on performance cannot exceed 20 percent of the fixed salary and allowances. For this, indicators such as ROA, ROE, NPL, liquidity, risk management, and customer satisfaction must be used as a basis.

In terms of benefits, the central bank has also adopted a 'one CEO, one vehicle' policy in a micro-management style, and has clarified that only one mobile and one laptop will be provided. The provision requiring a review of the salary difference between CEOs and assistant-level employees indicates that the central bank is encroaching on inequality within banks.

Micro-Management or Lack of Trust in Bankers?

Bankers view this 'back-to-back' activism of the central bank as a lack of trust. A CEO of a commercial bank says, 'As banks become more capable, the regulator should leave the decision-making authority to the banks, but instead, it is increasing control. This is extreme distrust of bankers.'

Former banker Parshuram Kunwar Chhetri also admits that the central bank has shown signs of micromanagement in some matters. He said, 'The formula for CEO salaries and the draft employee regulations show that the central bank is trying to make decisions on even the smallest matters within the bank. With the increase in bank capital and assets after mergers, the current limits may not significantly affect CEO salaries, but benefits for microfinance institutions may be reduced.'

However, Chhetri argues that the issue of asset details and beneficial owner identification is mandatory for the prevention of money laundering and should be viewed positively.

Central bank officials, however, claim that all these directives have been brought to make banks and financial institutions competitive, transparent, and excellent in corporate governance.

Sudha Shrestha, Deputy Spokesperson and Director of the Nepal Rastra Bank, said, 'The regulations and standards we periodically revise are a regular process. As banks become more capable, such steps are necessary to make them more responsible. This is also the regulatory responsibility of the central bank.'

The arrangements brought by the central bank one after another are expected to increase the operating costs of banks and add challenges to employee management. Bankers say that this provision, which is liberal towards employees, is likely to increase the expenses of banks.