Second-tier institutions proposed to regulate co-ops, contractual saving institutions

A policy input paper entitled 'Legal and Supervisory Structure for the Financial Institutions that are not Under Supervisory Perimeter of NRB' prepared by NRB states formation of second-tier institutions would help to prevent financial crisis resulting from the lack of monitoring and supervision of such institutions. There are altogether 13,313 saving and credit cooperatives, one Citizen Investment Trust, one Employees Provident Fund (EPF), one Postal Saving Bank (PSB), and around 40,000 NGOs that also provide financial services in different parts of the country. The central bank seemed worried particularly from the saving and credit cooperatives which are less regulated and supervised but have open and easy licensing policy. "Financial transaction of saving and credit cooperatives is very high and their transactions can have impact in the overall financial sector," reads the policy paper. "In the lack of adequate supervisory and regulatory role from the Department of Cooperatives, which issues license to the cooperatives, there is a possibility of financial crisis emanating from the cooperative sector that has not met the minimum financial standard and lacks financial discipline." While the policy paper has categorically specified problems and shortcomings of cooperatives, it has said that other contractual saving institutions like EPF and PSB also pose obstacles in implementation of the monetary policy. Over centralization in urban areas, investment in real estate sector, unproductive sectors and other risky areas, and liquidity risk in the absence of effective management of assets and liabilities, among other problems, in the cooperative sector have been underlined in the policy paper. The policy paper also states that the central bank, as a regulator and supervisor of financial institutions, cannot overlook the positive and negative impacts of the cooperatives' activities. It has also proposed five steps to bring financial institutions that are in operation but not under the NRB ambit into the perimeter of the new institution. According to the proposed steps, the number of such institutions has to be ascertained and their papers submitted to the second-tier institution for licensing has to be reviewed. Likewise, the policy paper says that on-site and offsite inspections should be carried before issuing the new license. Merger and liquidation of the institution is also what the paper has called for such institutions. It has also proposed various models about the structure of the second-tier institution.