Which bank or financial institution miserably failed in ensuring sound internal controls in 2012?
a) NB Bank b) H&B Development Bank c) Crystal Finance d) All of above[break]
Which insurance company faced regulator´s wrath for non-compliance in 2012?
a) Everest Insurance b) NB Insurance c) Lumbini Insurance d) All of above
Which cooperative tried to rip off depositors in 2012?
a) Oriental Cooperative b) Guna Cooperative c) Exim Cooperative d) All of above
Did you get your answers right? By the way, you must have also noticed something common. Yes, options a, b and c in all the questions refer to institutions that tried to breach customers´ trust through deception, misbehavior or outright fraud in 2012.
This probably makes one wonder if all the apples in the country´s financial sector are rotten. But that´s not the case. Yet a litany of controversial events that surrounded banks, financial institutions, insurance companies and cooperatives during the year does indicate to a broken corporate culture in the financial sector.
The extraordinary tales of culpable greed and deception started oozing out right from the beginning of 2012, with Asian Life Insurance´s illegal distribution of Rs 48.5 million in cash dividend in January.
The life insurer took this step despite knowing it was illegal, as it was yet to raise its paid-up capital to Rs 500 million as told by the Insurance Board. Yet it flexed its muscle and defied instructions given by the insurance sector regulator. Later, Ramesh Kumar Bhattarai, the then managing director of the company, who is said to have designed the plot, fell on his own sword and he was forced to quit. To teach the company a lasting lesson, the regulator also put a ban on all business activities of the insurer for over a month.
This action marked the beginning of the process of reining in insurance companies, which had virtually started considering themselves untouchables. As time passed, the Insurance Board also increased its scrutiny on all 25 insurance companies like never before. Gradually misdeeds of insurance companies were laid bare. Then one after another insures were fined and temporarily banned from doing business for string of offences ranging from conducting credit business to delaying claim settlement process and embezzling premium amount collected from the pubic - acts that went directly against the sentiment of customers and shareholders.
Throughout 2012, the Insurance Board - for the first time in its two-decade-long history - took action against seven insurance companies -- Asian Life, Lumbini, NB, Shikhar, Everest, state-owned Rastriya Beema Sansthan and NLG.
These series of wrongdoings later prompted the Insurance Board to launch a new regulatory drive aimed at strengthening the governance practices at insurance companies. This gave birth to a directive on corporate good governance. But its launch created uproar in the insurance sector, as it primarily targeted chief executives and investors of insurance companies.
Soon, promoters and CEOs of insurance companies started speaking out against provisions that, among others, barred chief executives from taking remuneration in excess of 15 times the remuneration of the lowest-level staff in a company. They also loathed the condition that prevented more than one member of a family from assuming post of board director in the same insurance company. What enraged them the most was the provision that barred insurance companies from generating business from their own promoters or their family members. To many companies, this condition was equivalent to death sentence as they were getting significant chunk of business from their parent companies, mostly involved in businesses ranging from aviation to manufacturing.
To protest the move, Everest Insurance even temporarily halted its business for several days and issued a warning to shut down the business for good. But the move backfired, as the regulator equated it with an insult and threatened to take further action if the company did not resume its business immediately. Everest was left with no option but to bow in front of the regulator. The episode ended with industrialist Rajendra Khetan, the company´s chairman, stepping down from his post.
Later, the issue on introduction of corporate governance directive also reached the Supreme Court, but the apex court upheld it.
Just like insurance companies that were infuriated with the launch of a directive on corporate good governance, bankers were also irritated with Nepal Rastra Bank, which in July barred board of directors, chief executives and management-level staff of banks and financial institutions from acquiring or renewing loans other than education, home, consumer and hire purchase.
Although the ban on chief executives and management-level staff of banks and financial institution from acquiring certain types of loans was acceptable, many were perplexed by the move to restrict board members´ access to credit. They argued this group of people generally included businessmen, involved in a range of business activities, and the provision “infringed on the fundamental rights of people to acquire loans lawfully”.
Yet the banking sector regulator did not budge. Instead, it counter-argued saying its motive was not to discourage board directors from doing business, as they were free to obtain corporate loans. The new provision, the regulator said, only targeted board directors, who were polluting the lending market by using influence to acquire loans and then defer payment.
A snapshot of what the central bank said was seen with the eruption of tit-for-tat battle between Nabil Bank and Nepal Bangladesh Bank, which had extended credit to each other´s board members. The war ended with Satyendra Pyara Shrestha, chairman of Nabil Bank, Bishnu Raj Adhikari, a promoter and director of Nepal Bangladesh Bank, and Jit Bahadur Shrestha, chairman of Nepal Bangladesh, (his son Jen Shrestha and brother Laxmi Bahadur Shrestha) being enrolled as willful loan defaulters in Credit Information Bureau´s list.
Since the existing Bank and Financial Institution Act does not allow any blacklisted person to assume post of board director of any bank or financial institution for at least three years from the day the person´s name is withdrawn from the list, these people automatically lost their job. However, Bishnu Raj Adhikari of Nepal Bangladesh Bank, in another display of sheer negligence, violated the norm by retaining his position of board director for several more weeks.
As this saga of involvement of board directors in fishy deals was unfolding, another bombshell was dropped in the financial sector with the central bank declaring Kathmandu-based Crystal Finance as ´troubled´ after it failed to recoup Rs 445.96 million in loans illegally extended to directors, promoters and individuals related to them.
Similar case of insider lending also put big financial cooperatives like Oriental, Guna and Exim in trouble in 2012. These cooperatives, which have collected around Rs 5 billion of public deposit in total, currently do not have enough money to pay their depositors as their promoters have channeled most of the funds to the stagnant real estate sector.
As these episodes were shaking the foundation of the financial sector, H&B Development Bank gave a devastating conclusion to the year by exposing a scam involving millions of rupees.
In the fraud case, Niraj Nepal, H&B´s Kuleshwar branch manager, had colluded with some schemers and issued good-for-payment checks worth millions of rupees despite knowing they did not have money in their accounts. So far, depositors are said to have lost around Rs 210 million, but since the case is still being investigated the damage could be even bigger.
These latest cases of misbehavior and outright fraud have once again started to corrode public´s trust on many of these institutions, while terrifying depositors. If these guardians of people´s money do not act like one soon, regulators will have no option but to introduce more harsh measures to rein in their activities.
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