Chapter (5) Five Banking Regulations.pptx

Banking Regulations

1. CHAPTER 5 BANK REGULATIONS AND CENTRAL BANK POLICY FOR BFIs

2. Banking Regulation Vs Supervision Bank Regulation refers to the provision of rules, restrictions and guidelines by the government and Central Bank to regulate (manage) the Banking and Financial Institutions (BFIs). Bank Supervision refers to the process of monitoring the Control systems, activities and financial condition of the Banks in order to ensure that these within the limits of the regulations as set out above. Both the terms are however used interchangeably in many context. In the Context of Nepal, BFIs are regulated by the Central Bank i.e. Nepal Rastra Bank (NRB) .

3. Common bank regulations include R eserve requirements (e.g . General Reserve) , which dictate how much money banks must keep on hand; C apital requirements (e.g. Capital Adequacy Ratio) , which dictate how much money banks can lend; L iquidity requirements (e.g. CRR and SLR) , which dictate how easily banks can convert their assets into cash. In addition, bank regulators often impose restrictions on bank activities, such as limitations on lending to related parties or investments in certain types of assets. e .g. SOL

4. Need and Significance of Bank Regulation Regulation:  The foremost objective of establishing regulations is to control the activities and functions of the BFIs . These institutions grow and develop new ideas to make their services better and meet the growing  demand . Since financial institutions’ offerings are increasing and diversifying, regulations are needed more than ever. Governance and core risk management:  Governance and core  risk management  principles guarantee the implementation, operation, and effectiveness of fundamental risk management, governance expectations, and robust internal controls. In addition, these principles work intending to prevent the economy from collapsing . Compliance:  The central banks of the respective countries lay down rules for the minimum lending and borrowing rates, along with  statutory liquidity ratio (SLR)  and  cash reserve ratio (CRR)  requirements. They are executed through the Bank regulations thus ensuring smooth  cash flow  inside the economy.

5. Contd .. Consumer protection:  Consumer protection is one of the regulations’ objectives. It is because, in the run for profit, BFIs may employ deceptive and unfair practices affecting innocent consumers. Anti-money laundering and other fraudulent activities: BFIs have access to funds that can be used for good and bad. While the government uses it for welfare programs, others may use it for self-interest. As a result,   money laundering  and other fraudulent activities can have a detrimental effect on the economy and society and, therefore, must be prevented. Capital, liquidity, and financial stability:   BFIs regulate the flow of money in the economy through lending and borrowing. Lending money to the general public encourages investment. Investments generate employment, and employment provides wages. When people have money to spend, they buy goods and services. It will, in turn, lead to more economic activity as the cycle continues. Banks ensure this cycle is smooth and continuous ; the regulations empower them.

6. Pros and Cons of Bank Regulations Pros Trust and confidence : When rules are laid down to regulate BFIs, it maintains public confidence over the Banking System . For example, DCGF protects against the loss of insured deposits. In addition, regulations ensure legal actions against violation .  Contributes to economic growth:  When  consumer confidence  exists, people willingly put money in BFIs instead of saving idly with them. The money deposited in banks aids in the creation of employment opportunities by increasing cash flow in the economy and investments.  Credit management:  A further significant benefit of banking regulation is  credit control . It stops the production of excessive credit (thus controlling inflation) by regulating  loans  and investments.

7. Pros and Cons of Bank Regulations Cons Less revenue:  Unnecessary control and stringent regulation may make it difficult for banks to operate freely . Thus, banks may be unable to make profits as much as they expect.  Failure:   Bank failures cannot be prevented by banking regulation; they only can curtail wasteful financial activities. Time-consuming and expensive:  Bank regulation is a time-consuming process and expensive to implement as a lot of thought goes into structuring the path of financial growth.

8. Banking Deregulation Bank Deregulation means reduction in Banking Regulations These laws are removed or reduced to ensure economic growth of the Country. This does not happen just because of mere will of any particular institution but due to the advancement in Technologies and interdependence of countries with each other, thus resulting in pressure over the Regulator to liberalize the BFIs. These regulations encompass various aspects such as interest rate controls , restrictions on market entry , and rules governing lending practices .

9. Impacts of Banking Deregulation in Nepal Increased Competition: For instance, in Nepal, the deregulation of interest rates on savings accounts by the Nepal Rastra Bank (NRB) has encouraged banks to compete more vigorously for deposits. This has led to higher interest rates being offered to depositors , providing them with more options and potentially better returns on their savings. Innovation: Deregulation can spur innovation within Nepal's banking industry. For example, following deregulation, banks in Nepal have introduced new digital banking services such as mobile banking apps and online payment platforms . These innovations have made banking more convenient for customers , especially in remote areas where access to traditional brick-and-mortar branches may be limited. Efficiency: Deregulation has the potential to improve efficiency within Nepal's banking sector. With fewer regulatory hurdles, banks can streamline their operations and introduce new technologies to automate processes. For instance, the adoption of core banking systems by Nepalese banks has enabled them to offer faster and more efficient services to customers , such as quicker loan approvals and online account management.

10. Impacts of Banking Deregulation in Nepal Risk Management: However, deregulation also brings risks , particularly in terms of risk management . For example, the relaxation of lending standards following deregulation could lead to increased lending to riskier borrowers , potentially resulting in higher default rates and credit losses for banks. Consumer Protection: Deregulation may weaken consumer protection measures in Nepal. For instance, the loosening of regulations governing fees and charges could result in banks imposing higher fees on customers for various services, potentially harming consumers, particularly those from lower-income backgrounds. Market Structure: Deregulation can also impact the market structure of Nepal's banking sector . For instance, following deregulation, larger banks may expand their market share through mergers and acquisitions , leading to increased concentration and potentially reducing competition in the sector.

11. Classification of Loans and Advances