Central bank should have power to liquidate sick financial institutions
The International Monetary Fund (IMF) has suggested the government to give more teeth to the central bank and let it have power to liquidate sick financial institutions.
It is necessary for the overall financial stability, advisor at IMF’s Monetary and Capital Markets Department Paul Mathieu said, here today.
Addressing the concluding visit of IMF’s annual Article IV Discussions and Financial Sector Assessment Programme here today, he said that the Bank and Financial Institutions Act (BAFIA) should include a clause that can give power to the central bank to shut down or liquidate financial institutions that have little chance of being revived.
Currently, the central bank must move to the Applette Court for the permission to send a financial institution to liquidation that takes longer time. "However, the power to liquidate sick financial institutions with the central bank will ensure speedy liquidation," he said, showing concern over existence of interconnected lending among the promoters of a financial institution and their businesses, asset quality and number of financial institutions.
The IMF also recommended strengthening of legal framework by upgrading BAFIA, Deposit Insurance Act and initiating the mechanism of collateral registry to avoid possibility of multiple pledging of the same collateral.
“There are far too many banks and many are weak and small," IMF’s mission chief for Asia and Pacific Department Alexander Pitt said, adding that although mergers are good, the central bank needs to be careful about not allowing merger of two bad institutions, which will create one bigger and weaker bank.
IMF also reiterated its stance against the central bank's move to cap spread rate at five per cent. "The spread rate cap will increase the risk of mispricing of risks as the banks might lend at lower rate than economically viable just to maintain spread or may not lend at all," the central bank's advisor added.
Likewise, the IMF also recommended to bring long term monetary instrument like treasury bills to manage excess liquidity from the market.
Growth in remittance that has helped improve rural economy has pushed up wages hitting competitiveness in agriculture and industry.
Mathieu, on the occasion, also stressed the need to effectively regulate mushrooming cooperatives as it could pose threat to the economy as a whole.
Economic growth at 4.5 per cent
The IMF has projected 4.5 per cent growth for the current fiscal year. the government had projected growth of 5.5 per cent due to growth and recovery in agriculture, strong services and rising public spending.