Chandan Sapkota’s Blog

Barely weekly after the announcement of the much-delayed cover the current fiscal season, Nepal Rastra Bank, or investment company developed a harsh plan that for the first time checks benefits and remunerations of CEOs of banks and financial institutions. The perks and salaries of CEOs have been a matter of argument for some time worldwide, following the 2008 global financial crisis especially. Agreed, as the existing pay scales of chief executives, in some full cases, are difficult to justify, a mechanism forged in participation and appointment of stakeholders was in fact an urgent need.

More than their incomes, which the banks have to create in their annual reports, the problem lies in perks that come in conditions of vehicles, housing and entertainment charges for main professionals. Since the majority of such perks are hidden in account sheets beyond the understanding of general shareholders opaquely, it is perceived they are grossly misused for personal benefits.

Having said that, my impression of the directive is that it is too fast and does more damage by adding to weakening competition and discouraging innovation in addition to barring best executing employees to enjoy prosperity. Till time, Nepal doesn’t have a single incident where the financial health of the financial institution have been problematic because of high perks and salaries of chief executives. Having belatedly woken up to waning reliability of the central bank or investment company, the measure seems to have been taken to secure quick popularity and regain the tarnished trustworthiness of the central bank or investment company. One of the ways to raise their earnings is to raise the level of staff expenses.

For that, they’ll either make an effort to persuade board of directors to raise the volume of employee expenses or show smooth corner when staffs demand higher pay. Even sometimes the plank will discover itself helpless to resist proposals to improve staff expenses to be able to retain capable chief executives by increasing their pay.

Another way is to increase the volume of total assets so that the leader can secure more pay in the coming year. For example, chief executives will be encouraged to extend more loans and investments, the two components that order a lion’s talk about in the assets of a financial institution so that they can claim more remuneration next year. The ultimate consequences of such risk-taking attitude, if it begins displaying in Nepal’s financial system, will be far disastrous than the risk posed by the prevailing pays off to them.

The NRB seems to have tactfully averted a possible confrontation with the powerful and important CEOs by allowing the incumbent chief executives to keep enjoying their existing income even after renewal of their agreement to employ in the same organization. So, established banking institutions and finance institutions won’t have to handle any serious impact of the new directives as they will continue steadily to have the incumbent chief executives so long as they want.

But upcoming finance institutions will face a problem in finding competent executives. As the personnel expenses and total resources of upcoming banks will be in small quantity, no experienced leader will think of becoming a member of a fresh institution. That type of situation shall discourage new financial institutions coming into operation, limiting competition thereby. Despite all the above agreements, my objection to the directive is that the measures are too rapid and too harsh and “one-fits-all” prescription to all or any banks and financial institutions, regardless of their financial health and past performances.

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Instead, I think all the banking institutions and finance institutions should have be first divided into two categories – financial institutions having negative and positive capital adequacy ratios (CAR) – and a different set of directives put in place to them. The recent NRB’s directive and guidelines devised to cap the executives´ pay is perfect to those organizations having negative CAR. However, among the financial institutions having positive CAR, the capping should be relaxed to the people establishments that produce normal revenue somewhat, say having a return on possessions (ROA) up to 2 percent.

However, there must be no limitations on perks and incomes for chief professionals of those institutions that are making healthy results, says ROA of more than 2 percent typically going back three years. What ultimately issues at the end of the day is not the chief executives´ salary, and benefits per se but the way they are performing and exactly how healthy is the financial condition of their organization.

Earnings in an IRA are usually tax exempt. However, certain investments can create taxable income called “unrelated business taxable income” (UBTI). Generally, UBTI is trade or business income that is not related to the tax-exempt reason for the IRA normally. The idea here’s that Congress will not want a tax-exempt entity competing with the taxable business enterprise next door to it.