--By Sanjeev Sharma

 

The once lucrative Nepali banking industry is now being deserted by long serving CEOs as they head on to start their own business or shift to other areas. The latest bank CEO who left is Suman Joshi of Laxmi Bank. Nearly a month ago, Grand Bank CEO Sudhir Khatri had resigned from his post. While some insiders claim that Joshi left the job as the main promoter of the bank stopped liking him and Khatri laid his papers to avoid actions from the central bank, banking sectors analysts have also started wondering if a new trend of CEOs leaving the banking sector has set in. This concern is based on the fact that some bank CEOs who resigned from their post have left banking career altogether. One such prominent example is Parshuram Kunwar Chhetri, who resigned when Bank of Asia that he was leading went to merge with NIC Bank to form NIC Asia Bank. One prominent exception to this is Kumar Lamsal who left Sanima Bank and joined Kist Bank as the CEO.   

 

This trend has triggered other concerns as well in the sector. Does this indicate the start of a new trend in the Nepali banking sector or is it just a momentary occurrence? Will the departure of experienced hands affect the overall stability of the country's financial sector? With long serving CEOs leaving the institutions, are BFIs losing opportunities to hire good executives?   

 

It's been more than two-and-half years since the Nepali banking authority issued directive and guidelines on the executive compensation system for BFIs. This 2011 policy mandates that the annual salary and perks of a bank’s CEOs cannot exceed more than five percent of the average staff expenditure of the respective institution over the period of three years or 0.025 percent of the total assets registered during the previous year, whichever is lower. This provision comes into action only while appointing new CEOs and spares the existing ones. With such a provision in place, the bank CEOs are left with three choices - work with present bank, join another bank on lower perks and salary or abandon the sector and look out for new avenues. 

 

Defending this cap, the central bank argued that it was aimed at discouraging banks from getting involved into unnecessary risk taking activities. "The executive compensation structure was widely regarded as one of the causes of the global financial crisis as it encouraged banks and financial institutions to get involved into high risk taking manoeuvres to increase short-term profit, eventually inviting long-term systematic risks," the NRB directive and guidelines states. The policy was introduced in the wake of rising fears of real estate bubble that followed the liquidity crunch of 2011. After the commencement of peace process in 2006, house and land prices soared to record high levels in major cities across the country forcing the NRB to tighten the provisions of bank lending into the real estate sector. 

 

Similarly, merger of BFIs is also seen as another reason to reduce the number of CEOs in the banking sector. Since only one CEO leads a bank, the CEO of one of the merging BFI is required to leave the institution during or after the merger process completes. NRB issued Merger Bylaws on May 2011, stating that it would strengthen the financial system and raise trust of public towards the banking sector. The main aim of the merger policy is to expand the capital base of BFIs and thereby strengthen their financial position to withstand various risks in the future. Following the policy rollout, 43 BFIs went for merger and resulted in the formation of 18 BFIs, official NRB data as of mid-March says. Of them two were 'A' class banks and 41 were 'B', 'C' and 'D' class institutions. NIC Bank and Bank of Asia were the first commercial banks to go for merger that resulted in the formation of NIC Asia. Recently the Global IME Bank and the Commerz and Trust Bank have also submitted their merger proposal to the central bank for final approval. Remaining 25 BFIs of all classes have received Letter of Intent (LoI) from the NRB to merge and form 10 BFIs. These mergers have resulted in 25 CEOs resigning from their posts as of March 2014. Commerz and Trust Bank CEO Anal Raj Bhattarai is said to be leaving his post following the the merger process.  

 

NRB stands quite firm to its decision to put cap on perks and salaries of bank CEOs. "It is wrong to say that supply of experienced chief executives have declined due to our directive and guidelines. We made the decision after evaluating various factors," says NRB Spokesperson, Bhaskar Mani Gyawali. "The factors include per capita income of the country and average pay scale in various sectors," he elaborated while claiming that introduction of the policy is making the Nepali banking sector more efficient as chief executives receive compensations according to the income of their respective institutions. "Bankers are now required to perform in more effective manner.  This ensures stability of the financial sector," he said. 

 

The departure of long serving CEOs has provided opportunity to second-layer bank officials to rise to the top spot. The second-tier officials can now groom themselves to grasp the chair of chief executive. Nevertheless, this has raised concerns regarding the risk taking appetite and the overall performance of banks as less experienced people come to the lead role.

 

NRB's argument has generated mixed views from experts. "CEOs who hold long experience in the sector are the essential part of the banking system. The sector as we know is all about experience. Long serving chief executives know the core of banking which gives the institutions edge to get ahead with proficient business strategies," says a former CEO of a commercial bank under the condition of anonymity. "They also have risk taking appetite to expand the bank’s business areas further." 

 

Sanjeev Subba, the CEO of National Banking Training Institute (NBTI) shared different view. "I think the departure of long serving CEOs won't affect adversely after all. The second and third tier officers are capable as they have come up with experience in different layers," he said. "This has provided them with significant experience over the years." Subba mentioned that Nepali commercial banking sector, which has been running for the past three decades has produced sufficient number of experienced manpower. For the perks and salaries part he opines, "Salary cap won't affect bank CEOs to renew employment contract within the same institutions. This will only affect those who are willing to join other organizations."

 

Suman Joshi, Laxmi Bank's former CEO expressed his perspective close to Subba. "Departure of experienced chief executives is unlikely to have overall adverse impact on the banking sector. Exit of the old and entry of new should be taken as two sides of a coin," he said. Joshi, however, cautioned that banks might see performance related issues as less experienced people take over the executive post. He also mentioned that Nepali banking sector has started to follow international trend. "If we look the international scenario, CEOs don't stay in the same responsibility for long time," he opines. 

 

Lack of motivational factor seems to be another reason for the CEOs to leave their jobs. "Bank CEOs get more salary compared to other sectors. However, working regularly for a long time without increment in salary creates an environment of de-motivation," says Bank of Asia’s former chief executive, Parshuram Kunwar Chhetri. According to him, many chief executives are facing the problem of stagnant salary levels and have to work under pressures of media, investors, shareholders and rising day-by-day business risks. "Nevertheless, financial institutions are run and governed by particular system, so a significant negative impact is unlikely in an event of a CEO leaving his post," Chhetri said.