cg in nepalese banking sector

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A seminar paper presented by: Santosh Sharma PUSOB, MBA-2011 Batch IMPLICATION AND CHALLENGES OF CG IN NEPALESE BANKING

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Existing rules and regulations for maintaining good corporate governance in Nepalese Banking

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Page 1: CG in Nepalese Banking Sector

A seminar paper presented by:Santosh Sharma

PUSOB, MBA-2011 Batch

IMPLICATION AND CHALLENGES OF CG IN NEPALESE BANKING

Page 2: CG in Nepalese Banking Sector

Content:OECD PrinciplesCritical area of CGExisting rules and regulationsFailuresCauses of FailuresRecommendation

Page 3: CG in Nepalese Banking Sector

OECD principles:Principle 1: Board qualifications, capabilities and

responsibilitiesPrinciple 2: Board’s role regarding the bank’s

strategic objectives and corporate valuesPrinciple 3: Lines of responsibility & accountabilityPrinciple 4: Ensuring oversight by senior

managementPrinciple 5: Auditors and internal control functionsPrinciple 6: Board & key executive compensationPrinciple 7: Transparent governancePrinciple 8: “Know your operational structure”

Page 4: CG in Nepalese Banking Sector

Critical area of CG-Basel Committee

Board Qualification and structureInternal ControlCommittee of the boardDisclosureManagement

Page 5: CG in Nepalese Banking Sector

Existing Rules and Regulations

Banking and Financial Institution Act 2063NRB Directives 6Company Act 2063

Page 6: CG in Nepalese Banking Sector

Banks and Financial Institutions Act 2063 (BAFIA 2063):

Conflict of Interest and TransparencySection 48-Restriction to give loans to promoter, director,

executive officer etcRestriction on dealing with shares by the directors, Officers

of the Bank(s.11)Disclosure requirement for directors regarding conflict in

appointment of auditors, shareholding by family members, transactions between bank and family members (s.22)

Directors not to take personal benefit (s.24)Disqualification of auditors and duty of the auditors (s.61

and s.63) Competent Key PersonnelQualification of directors and chief executive officers

(s.18,s.26)Requirement to appoint professional director(s.13)

Page 7: CG in Nepalese Banking Sector

NRB Directives 6:Code of Conduct for Directors Directors should not interfere in day-to-day operation

of the financial institution.If there is a conflict, director needs to inform the board

before assuming office.Directors should not involve in any activity which is

against the interest of the company (conflict of interest)

Chief executive should work fulltime. Directors of one deposit taking institution cannot act as

director of other FI.Director Cannot act as custodian or trustee of any of the

customer Director shall not misuse its position and should deal

fairly

Page 8: CG in Nepalese Banking Sector

Contd….Director should keep up to date and accurate

record of accounts and reportsDirector should not use or misuse information

received from clients for person benefitOutlines the duties and responsibilities of the

directorsProvides additional disqualification for the

appointment of chief executive directors Provides for code of conduct to be followed by

the chief executive and other employees.

Page 9: CG in Nepalese Banking Sector

Contd….Audit CommitteeHeaded non executive directorOutlines responsibilities of the audit committeeRestriction on granting of loan to directors,

shareholders, employees and firm related to such persons. (Conflict of interest)

Page 10: CG in Nepalese Banking Sector

Companies Act 2063: Conflict of Interest and TransparencyRequirement to give beneficial interest on the shares(s.47) Information required to be given on becoming substantial

shareholder (s.50)Shareholders having conflict are not qualified to vote in

general meetings(s.70)Director required to give information about transaction

between company and him/her or close relatives (s. 92)Approval of general meeting required to enter transaction

between company and director/its close relatives (s.93)Restriction on power of board to enter certain transaction

(s. 105)Restriction to give loans to directors and officers (s.101)Financial disclosures to the shareholders (s.109) 

Page 11: CG in Nepalese Banking Sector

Contd… DirectorsDirectors are made personally liable for any breach

of the ActDirectors have fiduciary duty to act in the best

interest of the company (s.99)Directors are specific duty not to exceed their

powers (s.103) Requirement to appoint independent directors by

public companies (s. 86)Directors who breach reporting requirement under

the Act are disqualified to become director (s.89)

Page 12: CG in Nepalese Banking Sector

Contd…Audit Listed companies having paid up capital of more than Rs. 3

crores need to have audit committee An auditor is disqualified to be appointed for three

consecutive years.(111) A person working full time, or his/her partners are

disqualified to be appointed as auditor (112) (iv) Shareholders’ Protection. Shareholder have right to inspect books of the company Shareholders can sue on behalf of the company.(s.140) Shareholders can request to appoint investigation officer

(s.121) Can prevent directors from exceeding their powers.(s.138)

Page 13: CG in Nepalese Banking Sector

The outcome….

Both

positive and

negative

Page 14: CG in Nepalese Banking Sector

Failures are:Nepal Sharemarkets and Financial InstitutionsSamjhana FinanceH&B Development BankKist BankNepal Bank LimitedNB BankGurkha Development BankAnd others……

Page 15: CG in Nepalese Banking Sector

The Reason …..Issue related to regulatorsLack of institutional capacity for enforcement of

laws, regulationsEnforcement authorities themselves lack good

governance. Lack of accountability of employees of regulating

bodies (need to have internal rules)Lack of resources within regulatorTransparent and scientific licensing policyLack of political and leadership willCourt have frequently intervened in regulatory

enforcement

Page 16: CG in Nepalese Banking Sector

Contd..

Issues related to BODBoard members are interested to use public

deposits as their own assets which is against the BAFIA 2063, article 48

Board members are inclined to authenticate the minutes after finishing the vested interest

The company enjoying the practice of CEO and Chairperson by the same gentle man are ahead in noncompliance activities

Big houses running many same nature business are manipulating public deposits and transferring the fund within the group in their own interest

Bank, FIs running by non professional are in severe noncompliance practices.

Page 17: CG in Nepalese Banking Sector

Recommended in the major area:Effectiveness of the boardFunction of the board and board committeeBoard meetingShareholders and disclosure of informationAccounting systemQualification and experience Audit committeeHRM

Page 18: CG in Nepalese Banking Sector

Last but not the least

SELF REGULATION IS BEST REGULATION