NRB empowered to deal with problematic BFIs

KATHMANDU:

Nepal Rastra Bank (NRB), the central bank, can now remove board members and CEOs of troubled banks and financial institutions (BFIs), sell shares and fixed assets of such institutions depending on the need and create a bridge bank to hand over assets and liabilities of problematic institutions to other BFIs.

These are some of the provisions incorporated in the Troubled Bank and Financial Institutions Resolution Regulation enforced by NRB.

The regulation explicitly explains actions that the central bank can take once banks and financial institutions are declared troubled.

These actions include initiating measures to improve the financial health of problematic BFIs, disposing of assets and liabilities of institutions beyond repair, forcing troubled institutions to merge with other banking institutions and laying the groundwork for healthy institutions to take over problematic BFIs.

These actions can be taken by the Troubled Institutions Division formed at NRB, according to the regulation, albeit recommendations of a five-member committee formed under the deputy governor may be required in certain cases.

The division can ask troubled BFIs to present short-, medium- and long-term plans and strategies to prop up the financial condition of institutions and recover bad debt. It can also ask the management of troubled BFIs to cut costs and launch recapitalisation plan, make arrangements to inject liquidity in the troubled BFI and annul any transaction made by problematic institutions.

If there be need, the division can also suspend or remove board directors, CEO and other staff of troubled institutions, and make necessary changes to the management to protect the interest of depositors and shareholders, the regulation says. Further, the division can sell shares of any shareholder to individuals, firms, companies and groups deemed appropriate by NRB.

“To expedite the reform process, NRB can also appoint an officer and give authority to the individual to design a plan to improve financial health of the troubled institution or takeover the management,” says the regulation. In the process of implementing the reform measures, the division can freeze or sell assets of board directors and employees, who fail to execute duties as per the instruction of the central bank. It can also sell assets of subsidiary companies of the troubled institutions to serve the interest of depositors.

“If there are no alternatives, the division can instruct troubled institutions to merge with other institutions or create groundwork for other BFIs to acquire the problematic institution,” says the regulation, adding, “While issuing such instruction, the division should scout for institutions with good turnover and wide network, and pursue principles of good governance. Preference should also be given to institution that is willing to acquire the entire assets and liabilities of the troubled institution.”

But if the entire assets of the troubled institution cannot be sold or transferred at one time, the assets and liabilities could be divided

into different categories and sold or transferred.

In case this process of selling or transferring assets and liabilities takes an awfully long time and this, in turn, raises cost and delays the reform process, the division can ask a licensed BFI to work as a bridge bank. The bridge bank should lay the groundwork for sales of assets of the troubled BFI or initiate liquidation process, says the regulation.

Other major provisions

•    Remove board members and CEOs of troubled BFIs

•    Initiate measures to improve financial health of problematic BFIs

•    Force troubled institutions to merge with other banking institutions

•    Lay the groundwork for healthy institutions to take over problematic BFIs

•    Ask a licensed BFI to work as a bridge bank

Source: THT