The central bank may soon have the authority to expedite the process of liquidating banks and financial institutions (BFIs), lay recommendations to bail out ‘too big to fail’ institutions and appoint bridge institutions to lay the groundwork for liquidation of banking institutions.
These powers are likely to be extended to Nepal Rastra Bank (NRB), the banking sector regulator, through NRB Act 2002, which is currently being amended by the government.
“The latest changes made to the Act have already been approved by NRB’s board of directors and are currently being reviewed by the Ministry of
Finance (MoF). Once the MoF endorses the amendments, the document will be forwarded to the Ministry of Law and then to the Cabinet prior to floating it in the Parliament for discussion,” a high-ranking MoF official told The Himalayan Times.
One of the key changes proposed by the Act is to extend authority to NRB to expedite the process of liquidating troubled banks and financial institutions (BFIs) to ascertain stability in the banking sector.
This process includes giving sole authority to NRB to settle assets and liabilities of troubled BFIs.
Currently, this work is being conducted by liquidators appointed by the court. However, such liquidators take years to complete the process, which affects depositors and others who have investments in these institutions.
NRB has so far decided to liquidate three financial institutions — Nepal Development Bank, Samjhana Finance and United Development Bank. Yet, liquidation process of none of the institutions has been completed, including that of Nepal Development Bank, which began as early as 2009.
“We hope the changes proposed through the Act will speed up liquidation process, providing relief to depositors and others who have claims on troubled institutions,” said a senior NRB official on condition of anonymity.
As per the draft of the revised Act, NRB may initiate asset-liability settlement process if BFIs fail to partially or fully clear off financial
liabilities; if BFIs are not in a condition to meet payment obligation of 90 days; if liabilities of BFIs exceed net
asset; and if capital and reserve funds of BFIs fail to absorb losses incurred by such institutions.
If these conditions are met, NRB can take over the management of the troubled BFI and depute a three-member special administrative team. Moreover if need arises, NRB can also appoint a bridge institution to perform the work of the special administrative team. “These teams and bridge institutions will be given the authority to manage fixed and movable assets of the troubled BFIs, settle their assets and liabilities, and manage other day-to-day works,” reads the draft. “These teams and institutions will also have the right to sell assets of troubled BFIs and nullify shares and debt instruments floated by them.”
During this course of overseeing the management, the special administrative team and bridge institution, however, can lay recommendations for the revival of the troubled BFIs through measures like forced mergers or equity sales. If not, asset-liability settlement process should be initiated to expedite liquidation process, says the draft of the revised Act.
Once the asset-liability settlement process begins, the special administrative team will have the right to invalidate transactions of the last three years that tended to favour one party or inflict losses on the other. Also, acts of the past five years that offended the interest of depositors can be rendered invalid.
“The special administrative team need not take permission of depositors or investors to take any action,” reads the draft.
However, if the fall of the troubled BFI is likely to affect financial system or stability, the team can recommend the government to inject funds to revive it, adds the draft.
source:the himalayan times,26 june 2014
LINK
These powers are likely to be extended to Nepal Rastra Bank (NRB), the banking sector regulator, through NRB Act 2002, which is currently being amended by the government.
“The latest changes made to the Act have already been approved by NRB’s board of directors and are currently being reviewed by the Ministry of
Finance (MoF). Once the MoF endorses the amendments, the document will be forwarded to the Ministry of Law and then to the Cabinet prior to floating it in the Parliament for discussion,” a high-ranking MoF official told The Himalayan Times.
One of the key changes proposed by the Act is to extend authority to NRB to expedite the process of liquidating troubled banks and financial institutions (BFIs) to ascertain stability in the banking sector.
This process includes giving sole authority to NRB to settle assets and liabilities of troubled BFIs.
Currently, this work is being conducted by liquidators appointed by the court. However, such liquidators take years to complete the process, which affects depositors and others who have investments in these institutions.
NRB has so far decided to liquidate three financial institutions — Nepal Development Bank, Samjhana Finance and United Development Bank. Yet, liquidation process of none of the institutions has been completed, including that of Nepal Development Bank, which began as early as 2009.
“We hope the changes proposed through the Act will speed up liquidation process, providing relief to depositors and others who have claims on troubled institutions,” said a senior NRB official on condition of anonymity.
As per the draft of the revised Act, NRB may initiate asset-liability settlement process if BFIs fail to partially or fully clear off financial
liabilities; if BFIs are not in a condition to meet payment obligation of 90 days; if liabilities of BFIs exceed net
asset; and if capital and reserve funds of BFIs fail to absorb losses incurred by such institutions.
If these conditions are met, NRB can take over the management of the troubled BFI and depute a three-member special administrative team. Moreover if need arises, NRB can also appoint a bridge institution to perform the work of the special administrative team. “These teams and bridge institutions will be given the authority to manage fixed and movable assets of the troubled BFIs, settle their assets and liabilities, and manage other day-to-day works,” reads the draft. “These teams and institutions will also have the right to sell assets of troubled BFIs and nullify shares and debt instruments floated by them.”
During this course of overseeing the management, the special administrative team and bridge institution, however, can lay recommendations for the revival of the troubled BFIs through measures like forced mergers or equity sales. If not, asset-liability settlement process should be initiated to expedite liquidation process, says the draft of the revised Act.
Once the asset-liability settlement process begins, the special administrative team will have the right to invalidate transactions of the last three years that tended to favour one party or inflict losses on the other. Also, acts of the past five years that offended the interest of depositors can be rendered invalid.
“The special administrative team need not take permission of depositors or investors to take any action,” reads the draft.
However, if the fall of the troubled BFI is likely to affect financial system or stability, the team can recommend the government to inject funds to revive it, adds the draft.
source:the himalayan times,26 june 2014
LINK
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