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November, 2003 |
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Legal Side |
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More on Blacklisting
by Bharat Raj Upreti The
Nepal Rastra Bank (NRB) has recently introduced new directive on
blacklisting (the Directive). The way in which this Directive has been
introduced gives a perfect example of our system which is not based on
any rule and lacks transparency and inclusiveness in the law making
process. General public including the stakeholders are rarely consulted
during the whole law making process. The Directive has come as a biggest
shock to the business community which was not consulted in the drafting
process despite the Directive having far reaching consequences on them.
This, however, is not something new. In Nepal, until recently a Bill
used to be stamped "confidential" till it was discussed by the
legislators. The
Directive is claimed to be introduced as a prudential norm to safeguard
our financial system. However, it has gone far away from being a
prudential norm. And the circumstances after the introduction of the
Directive suggest that it has been designed on the basis of few bad
cases. The regulator should have known that if any law is based on odd
cases you are bound to have a bad law. Leaving aside the legality and
rationality of the Directive, its introduction is also very untimely.
Currently, Nepali business community is facing the evils of disorder,
mismanagement, insecurity, extortions and war at different fronts. Due
to the Maoist violence, the business is at all times low. In addition,
there exists dual system of taxation for the business community, one of
the State and the other imposed by the Maoists. To make the matter
worse, the Regulator is squeezing the business community without any
sympathy and the new Directive is one such recent example. Legality,
Constitutionality and Rationality For
any provision to be effective as a law, it has to withstand mainly three
tests - legality, constitutionality and rationality. The Directive fails
all these three tests. The
Directive goes far beyond the nature of prudential norm and therefore
the NRB clearly does not have any authority to impose anything in the
nature of this Directive under the Nepal Rastra Bank Act 2058. Moreover,
the legality of the Directive stands on a shaky ground because of the
way it is introduced. Assuming that the NRB has authority to introduce
the Directive under the said Act of 2058, the Directive requires an
approval of the Board of the NRB. Some of the board members of the
NRB say they do not have knowledge about the Directive ever being
presented before the Board for approval. Under
the new Directive, where a person (including a legal person) is
blacklisted, the banks and financial institutions are prohibited from
extending credit facility to such blacklisted persons including their
close relatives. If a mother is blacklisted, her son or daughter cannot
avail credit facility from the banks and financial institutions. If a
private company is blacklisted, all its shareholders are automatically
blacklisted. A shareholder holding more than 10% share in a public
company which has defaulted a bank loan is also blacklisted irrespective
of whether or not such person is involved in the management of the
company. Further, the family members of the blacklisted persons also
cannot avail credit. In the present context, if these persons are
totally excluded from the financial system, it would be virtually
impossible for them to pursue any trade or occupation or even
profession. It seems that the NRB with its newfound autonomy feels
that it is above the Constitution of Nepal and absolute ruler who can
rule in isolation from the constitution. The Constitution of Nepal
guarantees right to profession, trade and occupation as a fundamental
right. The Directive ignores and violates such rights without there
being any reasonable legal justification. It
is very difficult to find any rational basis for the Directive for it is
based on none. There cannot be any good reason for blacklisting a person
only because one of its projects fails while, say for example, 10 others
are successful projects. If the rational was to force him to divert the
cash from other successful projects to bail out the concerned
unsuccessful project, then that would be ignoring other creditors and
investors who have invested in the successful projects because of their
financial strength of such projects. There can be no reason for
blacklisting the whole group of business if one of them fails. The
real economic impact of the Directive on the economy may be best
analyzed by an economist. But, this author can assert with some
confidence that if the Directive is implemented to its words, the banks
and financial institutions would not get any one left to do business
with. The
Directive also creates moral hazard as it takes all the risk off the
banks and financial institutions and lets them enjoy their profit
without having to take any risks. This in a long run would make our
financial institutions more incompetent as their incompetence will go
unpunished whereas it will fail to encourage entrepreneurship pushing
the whole economy towards poverty. It may pave the way for the failure
of the whole banking and financial system. Possible
basis for the Directive It
can be gathered from the published materials that the funding agencies
are pressuring the NRB to clean up the Non Performing Assets (NPA) from
the balance-sheets of some government owned banks and financial
institutions as a part of the effort at reforming Nepali financial
system, whereas, being the prime regulator and custodian of Nepali
economy, NRB should have been acting on its own. The NRB may well have
found a shortcut to that goal in the form of the Directive. However, in
doing so, the leadership of NRB is forgetting that it is cutting the
same branch of a tree on which it is sitting. Moreover, the Directive
fails to address the real problems that are giving rise to accumulation
of such huge NPA. The major contributors to the huge NPA are the
government owned banks whose lendings are political lendings and corrupt
lendings (with the involvement of security valuators and mangers of the
banks), where there is virtually no effective supervision of loan
utilization and where the management is unaccountable and inefficient.
This is also the result of waiver of prudential norms granted to these
pampered government banks in the past on case to case basis.
Unfortunately, the Directive, following this tradition, still exempts
the directors of the government owned corporate bodies from its ambit. It
is also a general feeling in business community that some persons
involved in the policy making of the NRB were involved in the shady bank
lendings in the past and they have designed this Directive as a face
saving effort or to grant themselves an immunity. This may also be one
of the many examples of decision making process being impaired with
vested interest. The contents of the Directives support this view to a
great extent. The
contents of the Directive also suggest that the NRB is lacking a
leadership which has dynamism and is capable of using prudence in
decision making on matters having long term impact on the overall
economy of the nation. Such dynamism and capability was expected from
the new autonomous Rastra Bank as envisaged by the Nepal Rastra Bank Act
2058. The expectation has been belied. What
needs to be done The
operation of the Directive should be immediately suspended. If the NRB
can not do without the Directive, it should make it applicable only in
the cases where the fraudulent lending and misuse of the bank fund has
been done and also only as a temporary measure. It should not be made
applicable where project or business failure is the result of market
forces or any event or circumstances beyond the control of the
enterprises. The
system of Credit Information Bureau (CIB) incorporated by the Directive
should however be encouraged and this institution should be
strengthened. Its role, however, should be restricted to the information
bank on credit worthiness of individuals or companies. The
provision should be made mandatory for the banks and financial
institutions to consult the information kept by the CIB before granting
any credit facility irrespective of the amount involved. We
need a system where the honest are rewarded and culprits are punished.
Therefore, the law should give different treatment to the debtors who
have no intention to fraud and to the debtors who have such intention.
To deal with the latter category of the debtors, a law focusing on
financial crime (for example, misuse of banking funds) should be
introduced on a priority basis. Under
the existing law, banks and financial institutions are given a great
deal of protection. However, there does not exist any standard to
measure the quality of services provided by the banks and financial
institutions. This sector should also take some initiative for self
discipline and formulate a banking code setting the standard of their
service. At least, in doing so the Nepal Bankers' Association can claim
to have done something visible. (Upreti is a leading corporate lawyer. He can be reached at Bharat@pioneerlaw.com) |
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