Loosely regulated cooperatives as risk to financial sector stability

Nepal Rastra Bank (NRB) Governor Chiranjibi Nepal has warned that the loosely regulated cooperatives those mobilize deposits are the biggest threat to the financial sector stability of the country.
Addressing at the inaugural session of interaction program on ‘Financial Sector Stability: A Priority for National Agenda’ organized by Society of Economic Journalists-Nepal in capital on Friday, NRB Governor Nepal said that the saving and deposit cooperatives as well as non banking financial institutions have posed unseen risks to the financial sector stability of the country.
Stating that the monetary policy for the current fiscal year 2018/19 has introduced several measures to strengthen the financial stability, he said that other financial institutions including saving and credit cooperatives are ‘unseen threats to the regulatory system’.
During the interaction programs, financial experts, policy makers and regulators say that the financial stability is a pre-requisite for economic growth and should not be taken as granted.
“The regulatory system of banking sector is very strong. So, the central bank is strong and capable to control bank and financial institutions. But, what about others?” he asked, referring to non-banking institutions and cooperatives who are not under the regulatory parameter of the NRB.
As more than 15 percent of the money is mobilized by the institutions that are out of the regulatory system, he said that any shock could pose threat to the entire financial system of the country.
“There is a huge movement of money in cooperatives. They must be regulated to make sure that the movement of money there is tracked,” he said.
Strengthening the supervision and monitoring of systemically important banks, branch audit of commercial banks, plan to develop housing price index and raising the limit of deposit guarantee to Rs 300,000 from Rs 200,000, among others, are some of the measures were introduced in the monetary policy as part of the efforts to strengthen the financial system of the country.
NRB Governor Nepal also underlined the need of a consistency of the financial sector stability. “There should be consistency in the stability of the financial sector. As observed in the 2008 financial crisis, any incident can destabilize the system. So our focus should be on maintaining consistency of the financial stability,” he added.
Shree Krishna Nepal, a joint secretary at the Ministry of Finance, also echoed the concern of NRB Governor Nepal. He termed the financial stability a pre-requisite to the economic growth of any country. “The global economy is moving toward normality and there is not any upheaval. But what we can learn from the global financial crisis is that if we cannot manage financial system, it can inflict damage on the economy and we have to suffer,” he said.
According to Nepal, who is also the chief of International Economic Cooperation Coordination Division of the MoF, the government has taken various measures to make the financial system prudent, reliable and stable.
Also speaking at the interaction program, Bimal Koirala, Political Economy Advisor at UKAid-funded Financial Sector Stability Program, underscored the need to strengthen the regulatory and supervisory capacity of regulatory bodies to maintain financial stability of the country. “The country has witnessed a lot of changes in financial sector in recent time. The number of bank and financial institutions has increased while cooperatives and non banking and financial institutions have emerged as an actor of the financial sector. Their monitoring and regulation is important for the financial sector stability,” he added.
Nara Bahadur Thapa, the Research Department Chief of the NRB, said that state-owned Rastriya Banijya Bank and Nepal Bank Ltd had threatened the financial sector stability of the country in the past. Stating that the government had to bail out these banks through the tax payers’ money of Rs 3.5 billion, he said that the crisis has also led to several reform initiatives in the financial sector.
Strahan Spencer, Senior Economic Adviser at DFID Nepal, said that the firms and households are vulnerable to economic or financial shocks. “One of the important lessons from the global financial crisis of 2008 is that we should not take financial stability as granted,” he said, warning that sophisticated financial products could pose risk to the financial sector.