Additional reading material to NRB Assistant Director Rudraksha Research & Publication

P Problem Solving- NRB Assistant Director

Introduction
In any organization, there are internal and external factors that create problems in day to day management.
Under this topic, we discuss the framework of identification of major problem and associated problems,
place where the problem lies, reasons of problem and its impact. Likewise, the prevailing policies and
programmes to address the problem, suggestions for solving the problem alongwith time bound action plan,
its monitoring and evaluation after implementation and concluding part also are the crucial part of the
framework.
Problem solving is the decision process used to address issues faced by individuals and society, including
personal and social language, improvement measures, policy changes, and structural changes.
Problem solving involves a process where the key problems are identified alongwith its impact, available
regulations and required action to be taken in a time bound matter so as to solve the problem.
The approach to problem solving is focused on providing the possible solutions as per the nature of the
problem, i.e., whether it is:
❑ National
❑ Monetary and economic
❑ Banking management, or
❑ Organizational structure and leadership
❑ Human resource management, etc.
There are many reasons of arising problems like
❑ structural ambiguity in organization
❑ managerial inefficiency
❑ frequent policy changes
❑ Lack of Organizational Alignment
❑ Failure to Develop Key Competencies
❑ Poor Communication Processes
❑ Operational lags
❑ Lack of Awareness
❑ Development & Strategic Issues, etc.
Particularly in banking sector, there are some key problems arising in day to day management, like
❑ Frequently changing liquidity position
❑ Regulatory compliance
❑ Long term loan from short term resources causing gap in liquidity balance
❑ Unfair market competition
❑ Increasing unproductive sector loans
❑ Frequent changing monetary and fiscal policy
❑ Lack of effective risk management strategies
❑ Economic downturn and lack of loan demand
❑ Delay in recovery of loan
❑ Misuse of productive, subsidized and deprived sector loans
❑ Problems related to foreign exchange policy and management
❑ trade union and management conflict
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

❑ Problems related to corporate governance

❑ Fulfill the technical issues arising on daily transaction
❑ Implement new and emerging technologies
❑ Stress management in employees
❑ Internal audit, risk management and compliance functioning not effective
❑ Problems to meet the deposit mobilization and loan expansion target, etc.
Similarly, there are some other crucial problems arising in the monetary and economic sector like
❑ Lack of effective fiscal policy by government
❑ Lack of synchronization or matching between fiscal policy and monetary policy targets
❑ Inflation control
❑ Foreign exchange management (reserve balance, pegging, etc.)
❑ Impact on current account, trade deficit and balance of payment
❑ Remittance based economy
❑ Government focus on revenue collection rather than financial stability and growth
❑ Consumption and daily administrative expenditure increasing compared to capital expenditure
❑ Limited base of capital market
❑ Insider trading of securities
❑ Donor agencies support not mobilized effectively as per national interest
❑ Impact of price elasticity higher on export than on import
❑ Budget preparation not on realistic approach and allocation very late, etc.
Human resource management is another main issue to be solved in this topic. There are many HR related
problems existing in public as well as banking sector. Some of the major problems are
❑ Lack of Collective Bargaining unity in employees union, i.e. absence of Collective Bargaining
Association (CBA).
❑ Trade Union and management conflict causing impact on overall organizational performance.
❑ Nepotism and favoritism in employee recruitment, selection, appointment, transfer, training and
promotion.
❑ Lack of 360 degree appraisal in performance evaluation
❑ Allowances uniformly distributed without evaluating work performance
❑ Unscientific and traditional performance evaluation system
❑ Lack of participative decision making
❑ Long recruitment process (21 days notice + double fine + examination date announcement )
❑ Managing the organizational hierarchy pyramid of employees as per their position
❑ HR empowerment with practical knowledge, skills and motivation, etc.
Problem Solving Process
Internationally, following is the problem solving process, that is widely followed.

Step 1:
❑ Define the Problem: It covers the queries like; What is the problem, How did we discover the problem,
When did the problem start and if data is available to contain the problem and prevent it from getting
passed to next step, etc.
Step 2:
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

❑ Clarify the Problem: Here the data availability regarding the problem, priority to resolve the problem,
resources required, etc. are analyzed. It involves "LEAN" event (i.e., planning, doing, checking, and
acting.)
Step 3:
❑ Define the Goals: It includes defining the end goal, task if the goal is accomplished and desired timeline
for solving the problem.
Step 4:
❑ Identify Root Cause of the Problem: This includes identifying possible causes, prioritizing possible
root causes and information to validate the root cause of the problem.
Step 5:
❑ Develop Action Plan: Here, a list of actions required to address the root cause, assigning an owner and
timeline as well as Status actions to ensure completion.
Step 6:
❑ Execute Action Plan: Now the action plan is implemented and completed actions are verified.
Step 7:
❑ Evaluate the Results: Here, it is monitored whether goals are accomplished or not and the data is
collected. If the problem is resolved, the activities added previously to contain the problem are removed.
Otherwise, the process is repeated.
Step 8:
❑ Continuously Improve: The additional opportunities to implement solution is looked and is ensured that
the problem will not come back. If needed, the overall process is repeated to drive further improvements.

Questions and Answer

 In Nepalese public institutions, there is existence of Employees union with different political
sentiments. These unions have helped to address genuine employees grievances, and
also establish a proper check & balance mechanism. However, the misuse of political
bargaining has caused poor productivity of these institutions. Many employees seem to
be lazy in work, and if management wishes to take strict action, they immediately take
the shelter of their associated unions. Questions are raising, as to why unions are required
in public institutions. Present the solution in an appropriate problem solving format.
Collective Bargaining: Problem and Solution
1. Background:
In public institutions, there are unions established for employee welfare but are attached to different political
beliefs. The motive of forming union is noble, but the actual scenario shows that many employees become
obsolete in work, and management is unable to take strict action, as the union has to protect employees taking
its shelter. On the other hand, the prevailing laws have strongly supported unionism citing human rights,
right for collective bargaining, etc.

2. Identification of the main problem:

More than one union in public institutions

3. Causes of the problem

• Different types of political affiliation resulting unnecessary political debate
• Union office bearers are not confident to form a collective bargaining association (CBA)
• Reluctance to change and do hard work
• Lack of proper management initiative
• Undue pressure from political parties to the management
4. Effect of the problem
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

• Poor efficiency of the employees & overall organisation

• Unable to meet budget and strategic plan
• Reputational risk, i.e., negative public sentiment
• Negative motivation in employees, i.e., not to work hard
• Increase in operational expenses
• Mismanaged employee rotation and posting issues, etc.
5. Prevailing laws and policies
• Constitution: Provided rights to run industries and mobilize resources. Similarly, fundamental right
is given to speak and present grievances.
• Trade Union Act: Provided rights to form employee unions from at least 25% of the total employees.
• 15th plan: Targeted for efficient human capital formation, to provide decent employment and
livelihood to employees
• Employee service byelaws of relevant organization: Provided right to form unions as well as right
to revolt against the unresolved issues with management.
• Act related to respective institutions (like BAFIA for banks, EPF Act, CIT Act, etc.)
6. Suggestions to the problem
• Short term
o Timely dialogue between management and union representatives to solve genuine issues
o Fulfilment of past commitments by the management made to the unions.
• Medium term
o Conduct CBA election
o Link performance appraisal to employee motivation schemes (like transfer, promotion,
monetary reward, etc.)
• Long term
o Automize and systematize operations through modern technology
o Maintain very few positions for union office bearers to reduce operating cost.
7. Action Plan
Suggestion Functions Responsible Measuring Time Budget Risk
Body Indicators
a. Short Term
- Timely dialogue - Form a team Top Reduced conflict Continuous Management
from management and smooth ………. may
management and Union operation undermine the
& union for union officers
periodic
discussion
Fulfilment of past - Execute the - BOD, top Increased benefit & 6 months Required Delay in
commitment by agreement management, issues addressed execution due
management through respective to unusual
Board or ministry Board
respective interference &
ministry delay by
ministry
b. Medium Term
- CBA election -Declare - Single union in -Political
election date organization & interference,
with Top smooth operation 2 years Required revolt by
arrangements management unions
- Link performance -Update HRIS - Systematic HR -High
appraisal to with management operating
motivation performance expenses in the
linkage beginning & IT
issues.
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

c. Long Term
-Automize and Link all HR & IT -Increased -Reluctance to
systematize incentives to Department employee change from
operations employees performance, stable employees,
through IT organization undue pressure
-Very few position in -Resolve most Top 3 years Required on
union office bearer of the HR management -Optimum HR management
issues expenses,
systematically sustainable profit -Union
so that and business of org. representative
minimum unwilling to
union reduce their
involvement position.
is required

8. Conclusion:
Trade union are required in an organization as there remains " check and balance", and governance. Performing
CBA election, linking reward with performance and systematizing operations alongwith scientific HR
compensation determination can solve the problem.

 The problem of regular fluctuation of liquidity in Nepal has been there for many years. Due
to this, the interest rate in the banking sector is not stable. After covid 19 there was a
massive investment from the banking sector, but then liquidity went into contraction. Since
the previous year, it seems that liquidity has accumulated more, remittance transactions
have also increased, and there is no such problem in foreign exchange reserves. If we say
that there is a global recession, the economy of our two neighbours is still growing. Even if
we blame the economic reform aspect on consumption expenditure, the government has
faced great difficulty in revenue mobilization and operations due to the decrease in
imports related to consumption expenditure at the present time. Banks have also been
facing the pressure of capital adequacy. In these situations identify the root
problem/problems and present the solutions in an appropriate format.

Liquidity Management: Problem and Solution

1. Background:
There has been excessive lending post covid 19 from the banking sector, which was necessary to mobilize
the economy, where various facilities and relaxations were provided for loan restructuring, additional
financing and interest rate relaxations. Thereafter, the economy followed slowdown due to international level
conflicts, rise in petroleum and other imports, lack of proper interest to government for solving the issues.
The trade cycle was affected and the overall sectors of economy went into sudden recession, that increased
NPL of BFIs. This also affected profitability, and then capital adequacy due to increased risk exposure.
Liquidity management has been major issue since the past that has increased threat towards financial sector
stability.

2. Identification of the main problem:

Long term financing from short term resources causing threat to sustainable management of liquidity.

3. Reasons of the problem

• Economic slowdown and contraction
• Impact on capital adequacy due to increased risk weighted exposure and countercyclical buffer
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

• Mismatch between assets and liability maturity

• Challenge to implement the working capital guidelines of
NRB
• Delay in Government expenditure and liability payment
• Loan concentration to few sectors and limited industrialists
• Misuse of loan and siphoning of funds to other sectors
• Unfair competition among BFIs, etc.
4. Effect of the problem
• Increase in non performing loans
• Decreased lending capaciy due to capital pressure
• Decreased exports
• Decreased confidence for investment expansion in business persons and banks
• Unfair competition in loan swap between BFIs
• Effect on interest rate stability, etc.
5. Prevailing policies & regulations for the problem
• Constitution of Nepal has visioned for welfare state and banking sector under Federal Government
Power, focus towards social justice and governance.
• Financial Sector Development Strategy focus towards quality banking service and financial sector
stability
• 15th plan focus on sustainable banking practice and establishing stable banking system
• BAFIA focus towards resource management, quality and reliable banking system, protection of
depositors interest and financial stability
• NRB Directives focus on liquidity and capital stability, liquidity risk management, etc.
• Other regulations like AML Act, Banking Offence & Punishment Act, Companies Act, etc.
6. Suggestions for solving the problem
• Short term:
o Maintain Optimum Bank Rate and optimize open market operations
o Relaxations in Risk Weighted Exposures in capital adequacy requirement
o Relaxation/Deferred Buffer requirement
• Medium Term
o Matching the lending and resource as per product basis
o Implement Basel III liquidity norms like Liquidity Coverage Ratio & Net Stable Funding
Ratio
• Long Term
o Real time supervision of BFIs through automated system
o Establish separate Board for productive sector investment (like NABARD in India for
agriculture sector development)
7. Action Plan
Suggestion Responsible Measuring Time Budget Risk
Body Indicators
a. Short Term
- Bank Rate, OMO - Decreased interest
related rate 3 to 6 ………. Impact on
-RWE relaxation NRB - Loanable fund rise months inflation
- Decreased/ Deferred - Loanable fund rise
Buffer
b. Medium Term
- Resource & lending BFIs - Maturity Balance -Within 2
match as per product of assets & year & then Required Impact on
liabilities Continuous profitability
- LCR & NSFR - Stable liquidity compliance
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

c. Long Term - Financial Sector 3 years Technological

-Real time NRB stability integration
supervision Required issues
- Increase in 4 years
-Separate board for Government production & Political
productive sector of Nepal productivity Stability issues

8. Conclusion: Financial Sector Stability is crucial to any economy. The current financial sector status of
Nepal shows negative sentiment to expand, which should be timely addressed with the continuous
involvement of government, central bank and the banking sector. The aforementioned suggestions will act
as a roadmap to mobilize the financial sector towards sustainable economic development.

 The banking system of Nepal has made a special contribution to the economic, social
and administrative development as well as the monetization of rural sector of Nepal.
Likewise, there has been a special contribution from the banking sector in priority sector
loans and subsidized full loans. However, there are also complaints that the deprived and
targeted sector is not receiving these loans in reality from the banking sector. Based on
this background, identify the major problems related to the effectiveness of the utilization
of subsidized loans flowing from the banking sector of Nepal and present the cause, effect
and implementable policy, structural or any other suggestions in a format for solving the
problem. 20
Effectiveness of deprived and subsidized loans: Problems and solutions
1. Background : Although the banking sector has an important contribution in the economic development
and monetization of Nepal, there is lack of proper mechanism to measure the effectiveness of deprived
and targeted sector loans.
2. Identification of the main problem
Main problem: Lack of effective monitoring framework to assess the deprived and targeted sector loan.
3. Reasons for the problem:
❑ No clear arrangement from Central Bank to monitor effectiveness of targeted and deprived sector
loans.
❑ Deprived Sector having poor knowledge about deprived sector loans.
❑ Rural branches of banks not able to expand the targeted sector
❑ Banks unwillingness to expand micro loans due to high operating cost.
4. Impact of the problem:
❑ Government and central bank target for targeted sector development not met
❑ Targeted loans focused towards higher income levels rather than deprived sector
❑ Lack of effective utilization of such loans
5. Existing Policies
a. Constitutional Provisions: Focus on equitable distribution of resources for poverty reduction
through public private partnership.
b. Legal and regulatory provisions:
❑ BAFIA, 2073 has mandated BFIs to lend to directed sector as prescribed by NRB
❑ NRB Directives 2079 has mandated BFIs to lend 5% loans to deprived sector and respectively
15%, 10% and 15% of total loans on agriculture, energy and MSME.
❑ 15th Plan has emphasized on production oriented approach and poverty reduction through
productive use of banking resources.
❑ Every Bank has credit policies addressing the targeted sector and deprived sector loan
provisions.
6. Suggestions to be implemented for Solving the Problem
a. Policy Reforms
❑ Policy measures to be implemented for measuring the effectiveness of targeted and deprived
sector loans.
 S. Suggestions Responsi Supporti Budget Time Risk Measuring Monitori
N. ble body ng body Indicators/ ng Body
Outcome
1 Policy
Reforms
• To NRB BFIs Requir Continuo Time National MoF
Measure ed us and Production
effective Budget Cost and

qualitative approach.
ness of constrai employment/
c. Other Reforms

such nt entrepreneurs
loans hip
b. Structural Reforms

development

A. Economy related issues

7. Time Bound Action Plan

• Policy NRB MoF Requir Continuo Credit Risk NRB

relaxatio ed us Quality Weighted
ns in Budget Exposure and
Credit Capital
Risk Adequacy
managem
ent
2 Structural
Reforms
• Effective NRB BFIs Requir Continuo Time Effective NRB
structure ed us and utilization of
of Budget cost such loans
Additional reading material to NRB Assistant Director

monitori constrai
ng to be nt
❑ Subsidies to be increased by the government

develope
d
• Approval BFIs NRB Requir Continuo Added Credit Board of
Mechanis ed us cost of Processing Director
m of BFIs Budget resourc time to be s of
to be es effective related
separate BFIs
for
❑ Government guarantee and insurance facility for such loans

deprived
sector
loans
3 Other
Reforms
• Governm
ent
❑ Effective structure of monitoring to be developed to evaluate such loans
❑ Policy reforms for relaxations in Credit Risk management for such loans

guarantee MoF NRB Requir Continuo Increas Increased MoF

and ed us ed Cost loans to
insurance Budget directed
facility sector
• Subsidies

Additional Examination Problems with major hints

to be
increased
by the
Rudraksha Research & Publication

❑ Approval Mechanism of BFIs to be separate for deprived sector loans with faster execution

and transparency will increase the directed and deprived sector lending of BFIs with both quantitative and
Conclusion, The aforementioned action plan implementation of suggestions with responsibility, accountability
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

Capital expenditure ratio to total expenditure not increased, budget expenditure allocation not systematic and
budgetary discipline not followed. Effective, result oriented, transparent, and responsible budget required.
[Hint]
Main Problem
Effectiveness of Fiscal Policy and Budget deteriorating.
Reasons of the problem
❑ Structure and policy formulation ineffective for capital expenditure.
❑ Foreign funded projects with their own unique restrictions and conditions.
❑ Ineffective inter-governmental co-operation
❑ Frequent changes in government and political instability
❑ Nepal’s difficult terrain and lack of adequate infrastructure making challenging to implement capital
intensive projects.
❑ Medium Term Expenditure framework not effectively implemented
Impact of the problem
❑ Poor capital expenditure
❑ Poor financial discipline
❑ External sector imbalance and geo-political issues
❑ Government revenue sources shrinkage
❑ Lower economic growth
❑ Regional imbalance between rural and urban sector
❑ Reduced productivity
❑ Increased income inequality
Policy Level Suggestions
❑ Ministry Level responsibility and emphasis on employee recruitment based on experience or knowledge
regarding the project.
❑ Project selection based on relevance and developed standards.
❑ Budget limit as per the Medium-Term Expenditure framework.
Structural Level Suggestions
❑ Establishment of Project Bank
❑ One Door System for foreign project acceptance
❑ Structural reforms in inter-governmental capital expenditure co-operation.
Other Reforms
❑ Adequate budget in National Importance Projects
❑ Foreign aid acceptance only on requirement

B. Monetary Related Problem

Nepal’s condition of AML/CFT is critical. Although, Nepal has not been in the grey list, still there are risks
as some compliances are remaining. Identify the causes of the problem, and present the efforts made by
Nepal and steps to be taken to get the best results in the evaluation by FATF. Also submit an action plan for
the implementation of the suggestion.
[Hint]
Main Problem
Nepal’s performance in AML/CFT assessment not as per global standards.
Reasons of the problem
❑ Ambiguity about crime limits in AML/CFT laws.
❑ High level of political involvement and support.
❑ Poor connectivity between FIU and DMLI
❑ Weak internal control framework, risk identification and management of reporting entity
❑ Technological streamlining for KYC and use of Artificial Intelligence lacking.
❑ Informal economy still in a larger concentration.
Additional reading material to NRB Assistant Director Rudraksha Research & Publication

❑ Delayed justice and legal proceedings.

Nepal Efforts
❑ Nepal as a member of APG, Egmont Group of FIU and Asset Recovery Interagency Network - Asia
Pacific (ARIN-AP)
❑ National Strategy and Action Plan on AML/CFT (2019-2024)
❑ Regulatory bodies of Reporting entities, Investigating agencies amd juidicial review.
❑ Mutual evaluation, National Risk Assessment and Self Assessment
❑ KYC and EKYC mechanisms, GoAML reporting and Regulatory Supervision.
Actions to be taken
Short Term (Immediate)
❑ Live Reporting Integration between Reporting Entities and FIU.
❑ Strong Inter governmental bodies interaction and political commitment.
❑ Proper training to staffs working in compliance departments and also ensure that they are of high morale.
❑ Awareness programs for Reporting Entities.
Long Term
❑ Use of modern technology for automated transactions reporting as well as AML/CFT compliance.
❑ Instant reporting and action driven approach for suspicious transactions.
❑ Boost the institutional capacity of FIU and DMLI.
❑ Developing integrated MIS reporting with AML/CFT compliance.
❑ Prioritize paperless and system integrated reporting, etc.

Monetary, Economics and Banking related combined problem

Fiscal Federalism
Acts, Laws and Policies Governing Fiscal Federalism
1. National Natural Resources and Fiscal Commission Act, 2074 (2017)
2. Intergovernmental Fiscal Arrangement Act, 2074 (2017)
3. Local Government Operation Act, 2074
4. National Natural Resources and Fiscal Commission Act, 2074 (2017)
5. "Sthaniya Taha Ko Barshik Yojana Tatha Budget Tarjuma Digdarshan, 2074"
6. "Pradesh Arthik Ain, 2077"
7. Inter Governmental Co-ordination and Interrelationship related Act, 2077
8. Existing national policies, State Policies and Local Policies.
9. Fiscal discipline and governance is not well ensured and public expenditure are not rational.
10. Revenue mobilization of state and local government is weak.
11. Culture of public expenditure accounting, auditing, review of one's public finance performance by the
provincial and local level on the basis of financial statements is not well developed.
12. Political focus on expenditure plans more than income plans, etc.
Improvement in Fiscal Federalism
❑ Building a strong inter communication and compliance as per Constitution of all the 3 tiers of government.
❑ Financial handovers to be in harmony.
❑ Uniformity and interlinkage for issues like taxation in local level, province level and state level.
❑ Expenses only on rational concept.
❑ Promotion of transparency.
❑ Necessary programs and trainings, etc.