Forum (Spotlight Weekly)

Ordinance Relating to Banks and Financial Institutions, 2060

By Sudheer Shrestha

His Majesty has recently promulgated Ordinance Relating to Banks and Financial Institutions, 2060. The law has unified the laws relating to banks and other financial institutions repealing a number of well working Acts. The law provides for the extra-territorial application of the law to any foreign branch of any bank or financial institution incorporated in Nepal, enablement to buy-back own shares by such institutions, prohibition on restrictive trade practice by the subject institutions, checking of money laundering etc. It has also adopted some of the already pronounced policies into statutory law, such as, requirement to float 30 percent shares to general public, directors’ disclosure, establishment of exchange equalization fund, opening of 100 percent subsidiary or branch office by foreign banks etc.

However, on the one hand the inevitability of this law at the time when the Parliament is defunct is debatable. The financial sector would not have turned upside down in the absence of this law at this point in time. On the other hand many provisions of the Ordinance in fact relate with other branch of law, or are scanty and ambiguous. The Ordinance as it stands now is an epitome of patchwork devoid of any clarity except the bundling of existing laws into one.

It is normal legislative practice to grant continuity to existing entities established under the old law when the new law is meant for the same entities. However, the Ordinance requires to reincorporate even the existing banks and financial institutions (sub-section 2 of section 30). The knowledge of prevailing law is a must before sitting to write any new law. With respect of the foreign exchange Nepal has a separate and complete Act known as Foreign Exchange (Regulation) Act 1963, which provides severe punishment for violation of foreign exchange regulation. However, the Ordinance partially repeats the punishment prescribed for such violation. The result is contradiction and incoherence. The amnesia is reflected in other sections as well. At section 51 the Ordinance provides that “the rate of interest payable in loan and deposits by the licensed institutions shall be as prescribed by Nepal Rastra Bank (NRB)”. When the law writing reaches down to section 86 it provides that “the rate and manner of interest payable on loan and deposits shall be as prescribed by the licensed institution!” A separate law is not required to restate that the provisions of the existing law shall be adhered with. But exactly the same has been done in the Ordinance. It provides that the banks and other financial institutions shall float the shares and securities to general public in accordance to the prevailing securities transaction law. There is again a complete separate law by the name of Securities Transaction Act 1983, which governs in detail about issuance of shares and securities and transaction thereof. The Accounting Standard Board and Auditing Standard Board constituted by the government under the Nepal Chartered Accountants Act, 1997 have setup many mandatory accounting and auditing standards. The law writer seems to be unaware of those developments as well as it intends to prescribe different standards. The Ordinance is also in conflict with Companies Act in matters of corporate governance.

The Ordinance has armed the NRB with one very objectionable power against the whole norms of general equity. Section 80 of the law equips NRB to order any bank to attach the account of any person to "maintain the national interest" in addition to in connection with any offence. It would been a condign if provisions were there to exercise this power at the request of any lawful investigating agency. The courts do already have power to attach any property including bank accounts. But the above mentioned section, by its language, gives unfettered power to NRB even in the absence of any reference from any law enforcement agency. How can the officers of NRB determine any deposit as illegal! NRB is also empowered to punish banks and financial institutions without seeking any explanation!

There are other provisions that intends to censor even proven expertise. For example, in case of commercial banks, sub section (2) of section 26 of the Ordinance requires the chief executive to be the master in economics, money, Banking, finance, commerce, accounts, management or commercial law. With respect of the account discipline, two different words are used, viz, "charter accountancy" is mentioned in clause (a) of section (1) of section 13 while enumerating the qualification of professional director, whereas the word “chartered accountancy" is omitted in section 26. It appears that the controlling draftsman was obsessed with "master" degree who may have earned that degree after a lot of failures. Innumerable examples are found where the none-master degree holder entrepreneurs are in the zenith of business in which they never obtained formal education. In the context of Nepal some of the successful bankers are chartered accountants and holder of other lesser or different qualification. The law makers are expected to know the ground realities. Was the omission an ignorance or deliberate and mischievous?

The Ordinance is also very confusing in other respects. Sub-section (1) of section 19 requires at least two-third of the directors to posses the qualification enumerated in that section. Nepali banks and financial institutions comprise of several classes of shareholders. It does not say from which class of the shareholders such two third is to be chosen , i.e., from the promoters or the public shareholders? The requirement of re-incorporation of existing banks and financial institutions will lead to a further dead-lock. There are many organizations, which has issued less than thirty percent shares to general public. The law is silent on the point that who from the existing shareholders will have to divest the shares to increase the shareholding of the general public.

The law also brings some other devastating consequences. It is known to all that entrepreneurs from all quarter are demanding for more balanced labour law instead of the present so called protective labour law. The repealed laws related with the banks and financial institutions had given overriding power over general labour law. But there is no such protective clause in the present Ordinance which is a must in such specialized institutions. Moreover, section 72 of the Ordinance opens the door of the banks and financial institutions to police for any kind of investigation including in banking management and operation! Previously it was restricted to withdrawal of bank funds by forgery.

The widespread rumor is that the Ordinance was initially returned by Palace to the Government due to the foregoing lapses but the Government sent it again on the behest of a donor agency. It is said such interference in the name of good governance is common these days. Financial and information assistance to a country like Nepal is welcome and a must. But the laws like the present one, or the one like the Ordinance relating to BOOT promulgated few months before that projects for the plan of several years whose life is itself for six months reflect the constrain of donor agencies to exhibit the expenditure under Nepal chapter rather than the actual good governance. Huge amounts has been spent by stakeholders participating in series of seminars and workshops to draw attention on the problematic and unrealistic provisions of the Ordinance which in itself should be a matter of shame to such donor agencies. However, since the law is already born it is expected that the shortcomings, both in language and essence, will be improved in the next edition of the Ordinance as per the suggestions received from the volunteer experts. It is heard that many other laws relating with the business and commercial sector are in pipeline. Some intends to repeal the existing laws without assessing the efficiency of those laws at the wish of donor agencies even though the little objects purported by new draft laws prepared at the huge financial assistance could be achieved by inserting few sentences in the prevailing laws. It will be dishonesty to nation to bring an upheaval in the existing structure simply to please those agencies.

(The Writer is a corporate Lawyer. He may be reached at sudheer@mail.com.np )