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FINANCIAL STABILITY

REPORT

Nepal Rastra Bank

Central Office

Baluwatar, Kathmandu

July, 2014

FINANCIAL STABILITY

REPORT

(July 2014 Issue No. 5)

Nepal Rastra Bank

Central Office


2 DISCLAIMER

This fifth issue of the Financial Stability Report is based on the provisional data of

Bank & Financial Institutions (BFIs) and other financial institutions as of mid-

July 2014. Data used in its analysis may thus differ from the most recent statistics

or audited final data published by BFIs. All the findings, interpretation and

conclusions expressed in this report do not necessarily reflect the views of Nepal

Rastra Bank or its Board of Directors. The colors, boundaries, denominations or

any other signs and symbols used in the report do not imply any metamorphic

judgments. This report, unless or otherwise stated elsewhere, covers the

developments and risks during the year to mid-July 2014.

Nothing herein shall constitute or be considered to be a limitation upon or waiver

of the provisions of existing rules, regulations and legislations.

Published by:

Nepal Rastra Bank

Central Office

Banks and Financial Institutions Regulation Department

Financial Stability Unit


Nepal

Ph: 977 1 4411407 Ext. 171

Fax: 977 1 4414552

Email: [email protected]

Contents

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CONTENTS

Foreword

Acronyms

Executive Summary ......................................................................................... xiii

Chapter I - Macroeconomic Development ................................................... 1-15

Global Economic Development ............................................................................. 1

Global Inflation ...................................................................................................... 6

Crude oil ................................................................................................................ 8

Domestic Macroeconomic Development ............................................................... 9

Economic Growth ............................................................................................ 9

Inflation .......................................................................................................... 10

Government Finance ...................................................................................... 11

External Sector .............................................................................................. 12

Exchange Rate .............................................................................. 13

Monetary Situation ........................................................................................ 13

Liquidity Management ................................................................................... 14

Chapter II - Financial System Performance and Stability ...................... 17-57

Global Financial Stability Perspectives ............................................................... 17

Nepalese Financial System: An Overview .......................................................... 18

Size of the Overall Financial System ............................................................. 18

Structure and Performance of Banks and Financial

Institutions ..................................................................................................... 23

Assets Structure of Nepalese Banking System ............................................... 24

Credit Concentration in the Banking sector .................................................. 25

Herfindahl-Hirschman Index for determining Loan

Concentration ................................................................................................ 26

Real Estate Lending ....................................................................................... 27

Progress on Directed Lending: Productive Sector Lending &

Deprived Sector Lending ............................................................................... 29

Liability structure of the banking sector ........................................................ 31

Financial Stability Report

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Financial Soundness Indicators ........................................................................... 32

Base Rate of BFIs ................................................................................................ 44

Interest Rate Spread ............................................................................................. 46

Banking Sector Consolidation: Mergers & Acquisitions .................................... 47

Financial Access and Inclusion ........................................................................... 49

Performance and Reform of State Owned Banks ................................................ 54

Chapter III - Deposit Taking Institutions.................................................. 59-71

Performance of Commercial Banks ..................................................................... 59

Stress Testing of Commercial Banks ................................................................... 61

Performance of Development Banks ................................................................... 64

Stress testing of Development Banks .................................................................. 65

Performance of Finance companies ..................................................................... 67

Performance of Microfinance Financial Institutions ........................................... 69

Rural Self-Reliance Fund (RSRF) ....................................................................... 71

Chapter IV - Cooperatives, FINGOs and Other Financial

Intermediaries ...................................................................... 73-80

Performance of Cooperatives ............................................................................... 73

Financial Non-Government Organizations .......................................................... 76

Other Financial Institutions ................................................................................. 76

Chapter V - Financial Markets ................................................................... 81-86

Global Financial and Money Market Perspective ................................................ 81

Domestic Financial Market .................................................................................. 83

Chapter VI - Financial Sector Policies and Infrastructures .................. 87-109

International Financial Regulatory Reforms and Nepal ...................................... 87

Other Major Developments in Financial Sector .................................................. 94

Domestic Regulatory Developments ................................................................... 99

Monetary Policy ................................................................................................. 108

Statistical Annex

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Statistical Annex

Annexes Page

No.

Annex 1: Structure of Nepalese Financial Sector 110

Annex 2: Aggregate Statement of Assets and Liabilities of BFIs 111

Annex 3: Statement of Assets and Liabilities of BFIs 113

Annex 4: Major Financial Indicators of MFFIs 115

Annex 5: Aggregate Sector-wise, Product-wise and Security-wise

Credit by BFIs

116

Annex 6: Aggregate Profit and Loss Account of BFIs 118

Annex 7: Financial Soundness Indicators (FSIs) of BFIs 120

Annex 8: Stress Testing Results for Commercial Banks 122

Annex 9: List of Merged BFIs 124

Annex 10: Composition of Financial Stability Oversight Committee 127

Annex 11: Composition of Financial Stability Sub-Committee 128

List of Boxes

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List of Boxes

Box 1.1: RBI towards Inflation Targeting 7

Box 6.1: Capital Regulation in Nepal 90

Box 6.2 OECD Principles on consumer financial protection: 102

Box 6.3 Major provisions proposed on the consultative directives on

consumer financial protection and financial literacy 103

List of Figures

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List of Figures

Figure 1.1: World Growth projections 3

Figure 1.2: Global Inflation Trends 6

Figure 1.3: Monthly Crude Oil Price Movements 9

Figure 1.4: Growth Rate of GDP 10

Figure 1.5: Changes in Consumer Price Index 11

Figure 1.6: Remittance Inflows 12

Figure 1.7: Exchange Rate Movement of NRs. with US Dollar 13

Figure 1.8: Growth in Money Supply 14

Figure 2.1: Global Financial Stability Map 17

Figure 2.2: Structure of Assets Holding in Financial System 21

Figure 2.3: Total Assets and Assets to GDP Ratio Growth 21

Figure 2.4: Growth in Total Assets 22

Figure 2.5: Growth in Assets to GDP ratio 22

Figure 2.6: Number and growth of BFIs licensed by NRB 23

Figure 2.7: Total Assets of Banking System 25

Figure 2.8: Real Estate Exposures of BFIs 28

Figure 2.9: Indirect Real Estate Exposures of BFIs 29

Figure 2.10: Share of Commercial Banks in Productive Sector Loan 30

Figure 2.11 Deprived Sector Lending by BFIs 31

Figure 2.12 Liability in Banking Sector 32

Figure 2.13 Deposit Liabilities by types of Account 32

Figure 2.14: Capital Fund, CAR and CCAR of BFIs 33

Figure 2.15: Capital to Tier-1 ratio and overall CAR of the Commercial

Banks 34

Figure 2.16: NPL ratio and LLP ratio of BFIs 35

Figure 2.17: NPL composition of BFIs 36

Figure 2.18: Leverage ratio of Commercial Banks 37

Figure 2.19: Trend of Credit Growth 38

Figure 2.20: Trend of Deposit Growth 38


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Figure 2.21: Credit Deposit and CD Ratio of BFIs 39

Figure 2.22: Class wise Profitability of BFIs 39

Figure 2.23: Net Profit, ROE, ROA and Interest Margin to Gross

Income Ratio 40

Figure 2.24: Ratio of Non Interest Expenses to Gross Income 41

Figure 2.25: Liquidity Indicators of BFIs 42

Figure 2.26: Base Rates of Commercial Banks 45

Figure 2.27: Net interest Spread of Commercial banks 47

Figure 2.28: Deposit, Lending, Spread & Base Rates 48

Figure 2.29: Ten Districts with Lowest and Highest Numbers of Bank

Branches 52

Figure 2.30: Share of SOBs in Total Assets 54

Figure 2.31: Paid-up Capital, Capital Fund & Deposits of SOB 55

Figure 2.32: Tier 1 and Tier 2 Capital of SOBs 56

Figure 2.33: NPL and LLP Ratios of SOBs 57

Figure 4.1: Structure of Cooperatives 74

Figure 4.2: Regional Distribution of Cooperatives 74

Figure 4.3: Uses of Funds of CIT 78

Figure 5.1: Three-Month US Treasury Bills Monthly Average Interest

Rate 81

Figure 5.2: Ten-Year US Treasury Constant Maturities Monthly

Average Rates 82

Figure 5.3: US Dollar Index Daily Movement 83

Figure 5.4: Weighted Average Treasury Bill Rate 83

Figure 5.5: Weighted Average Inter-bank Rate 84

Figure 5.6: NEPSE and Sensitive Index 85

List of Tables

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List of Tables

Table 2.1: Number of BFIs and Other Institutions 20

Table 2.2 Sector-wise loans concentration 26

Table 2.3 Financial Soundness Indicators of BFIs 43

Table 2.4 Branches of BFIs 51

Table 2.5 Regional Allocation of BFI Branches 51

Table 2.6 Presence of BFIs in Least Banked Areas 52

Table 2.7: Use of Financial Services 53

Table 2.8: Status of Branchless and Mobile Banking 53

Table 3.1: Major Financial Indicators of Commercial Banks 60

Table 3.2: CAELS Rating of Development Banks 65

Table 3.3: Stress Test Results of Development Banks 66

Table 3.4: Major Indicators of MFFIs 71

Table 4.1: Capital, Savings and Loans and Advances of Cooperatives 75

Table 4.2: Growth in Numbers of Cooperatives over the years 75

Table 4.3: Number of Insurance Companies 77

Table 4.4: Status of Postal Savings Bank 78

Table 6.1: Shadow assets 93

Table 6.2: Household loan from different sources 94

Table 6.3: AML/CFT Examination Guidelines/Procedures 97

Source: Statistics, BFIRD, NRB

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This page is intentionally left blank.

Foreword

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GOVERNOR

Foreword

Nepal Rastra Bank has been regularly publishing Financial Stability Report since

2012. This report aims to share information and ensure transparency in the

functioning of the financial system. This Report, fifth in the series of such

publication, is prepared by Financial Stability Unit (FSU) and Financial Stability

Working Committee (FSWC) under the guidance of the Financial Stability

Oversight Committee (FSOC), which is chaired by senior Deputy Governor of

this bank. This assessment is based on the data of mid-July 2014 unless otherwise

stated.

This publication has come out with the hard work of our staff and senior officials.

In this context, I would like to thank the FSOC, FSWC and the Bank and

Financial Institutions Regulation Department of this bank, particularly the FSU

for preparing this report. I would like to offer my special thanks to the officials of

FSU, notably Executive Director Mr. Manmohan Kumar Shrestha, Director

Mr. Ramesh Kumar Pokharel and Deputy Directors Mr. Ramu Poudel and Ms.

Samjhana Dhakal and Assistant Director Nabin Timilsina for their untiring efforts

in bringing out this report to this form. I would also like to thank Deputy Director

(Computer) Mr. Krishna Gopal Shrestha for his assistance in layout and

formatting of the final report.

I hope this report will facilitate the path of our financial stability effort and help to

formulate, implement and communicate monetary and financial stability policies

in the days to come. This report could also be useful for those interested in

research on financial stability and macro-prudential policies and in the areas of

Nepalese financial economics.

Dr. Chiranjibi Nepal


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Acronyms

ADBL Agriculture Development Bank Limited

AE Advanced Economies

ATM Automatic Teller Machine

BAFIA Bank and Financial Institution Act

BCAP Basel Core Principle Assessment Program

BCP Basel Core Principle

BFIs Bank and Financial Institutions

CAR Capital Adequacy Ratio

CBS Central Bureau of Statistics

CBs Commercial Banks

CD Ratio Credit to Deposit Ratio

CEO Chief Executive Officer

CIT Citizens Investment Trust

CPI Consumer Price Index

CRR Cash Reserve Ratio

CYFI Child and Youth Finance International

DBSD Development Bank Supervision Department

DOC Department of Cooperatives

EA Euro Area

ECB European Central Bank

EDA Emerging and Developing Asia

FI Financial Institution

EMDE Emerging Market and Developing Economies

EMEs Emerging Market Economies

EPF Employee Provident Fund

FINGO Financial Non-government Organization

FMD Foreign Exchange Management Department

FSAP Financial Sector Assessment Program

FSI Financial Soundness Indicators

GBBs Grameen Bikash Banks

GBP Great Britain Pound

GDP Gross Domestic Product

GFSR Global Financial Stability Review

Acronyms

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GoN Government of Nepal

IC Insurance Companies

IFIs Informal Financial Intermediaries

ILMF Institution-wise Liquidity Monitoring Framework

IMF International Monetary Fund

INR Indian Rupees

IPO Initial Public Offering

LCY Local Currency

LHS Left Hand Side

LIBOR London Interbank Borrowing Rate

LLP Loan Loss Provision

LMFF Liquidity Monitoring and Forecasting Framework

LoLR Lender of Last Resort

MFFI Micro Finance Financial Institutions

MFIs Micro Finance Institutions

NBA Non-banking assets

NBL Nepal Bank Limited

NC Nepalese Currency

NCDB National Cooperative Development Bank

NEPSE Nepal Stock Exchange

NGO Non-government Organization

NIDC Nepal Industrial and Development Corporation

NPA Non-performing Assets

NPLs Non-performing Loans

NRB Nepal Rastra Bank

OMOC Open Market Operation Committee

PCA Prompt Corrective Action

POS Point of Sales

PSB Postal Saving Bank

RBB Rastriya Banijya Bank

RHS Right Hand Side

ROA Return on Assets

ROE Return on Equity

ROSC Reports on Observance of Standards and Codes

ROSCAs Rotating Savings and Credit Associations


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RSRF Rural Self Reliance Fund

RWA Risk Weighted Assets

SA South Asia

SOBs State Owned Banks

SCCs Saving and Credit Cooperatives

SEBON Security Board of Nepal

SLR Statutory Liquidity Ratio

SOL Single Obligor Limit

U.S United States

UNCDF United Nations Capital Development Fund

WEO World Economic Outlook

WESP World Economic Situation Prospects

Executive Summary

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1 EXECUTIVE SUMMARY

Global growth is projected to rebound and the strongest rebound in growth is

expected in the United States, whereas the debt-crisis won't let the Euro-area rise

sooner and growth in Japan is projected to remain modest. Growth in most

emerging market and developing economies is projected to be supported by the

waning of temporary setbacks to domestic demand and production (including

from geopolitical tensions); policy support to demand; the gradual lifting of

structural impediments to growth; and strengthening external demand from

advanced economies. These developments in growth are expected to support

global financial stability in near term by reducing the downside risks.

Inflation will remain below central bank targets in advanced economies. In the

euro area, inflation is projected to increase gradually as the recovery strengthens

and output gaps slowly decrease whereas in emerging market and developing

economies and to remain broadly unchanged in 2015.

The overall domestic macroeconomic situation remained satisfactory in 2013/14.

Real GDP at basic price grew by 5.2 percent in 2013/14 compared to a growth of

3.5 percent in the previous year. The growth rate of the agriculture and the non-

agriculture sectors were 4.7 percent and 5.3 percent, respectively in 2013/14

compared to the growth rates of 1.1 percent and 4.6 percent, respectively in

2012/13. The annual average consumer price inflation increased by 9.1 percent in

2013/14 compared to an increase of 9.9 percent in the year 2012/13. The price

index of food and beverages group increased by 11.6 percent whereas the index of

non-food and services group increased by 6.8 percent in 2013/14.

Global Financial Stability Report states that the locus of financial stability risks

has shifted because an increase in risk appetite has driven the search for yield and

pushed up market and liquidity risks. Credit risks in the global financial system

have declined, reflecting favorable funding conditions and improved asset quality.

The same report depicts that the global banking system is now better capitalized

than at the onset of the financial crisis in 2008, due to adoption of better

regulatory initiatives. One of the major concerns after the global financial crisis

has been directed toward the regulation of shadow banking.


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For the last two years, banking system of Nepal is experiencing an encouraging

restructuring and consolidation, particularly through the merger and acquisition.

As on mid-July 2014, 9 commercial banks, 25 development banks and 27 finance

companies were merged to become 5 commercial banks, 16 development banks

and 25 finance companies, which altogether 61 BFIs have merged with each

other, leading to the creation of 25 BFIs. As of mid-July 2014, the total number

of financial institutions stood at 276 comprising of 204 BFIs of ―A‖, ―B‖, ―C‖ and

―D‖ categories, 44 other financial intermediaries licensed by the NRB, 25

insurance companies and one each of EPF, CIT and Postal Saving Bank.

Similarly, a large numbers of cooperatives are operating throughout the country

and are under minimal regulation and thus posing threats to financial stability.

In terms of total assets and liabilities, banks and financial institutions shared 87.9

percent of total financial system of Nepal in mid-July 2014. Such share stood 11.3

percent for the contractual saving institutions. In terms of share in total assets, the

commercial banks remained the key player in the financial system occupying 50.8

percent of the system's total assets.

Total assets of BFIs have continued to increase. As of mid-July 2014, total assets

of BFIs increased by 18.96 percent to Rs. 1877 billion in comparison to the same

period of last year. Big chunk of BFIs assets (loans and advances) is concentrated

in eight key areas of economic activities. As on mid-July 2014 trade (wholesaler

& retailer) accounted for 21.6 percent of bank lending, followed by manufacturing

(19.7 percent), construction (10.5 per cent), real estate (8.0 percent), consumption

(7.7 percent), agriculture and forestry (4.3 percent) and transportation and

communication (3.9 percent).

Financial soundness indicators show that the banking system performing well

during the year 2013/14. Capital fund of BFIs increased by Rs. 14.1 billion to Rs

4749.6 billion, Deposits in BIFs grew by 18.2 percent to reach Rs.1477 billion.

The overall profitability of banking sector increased by 13.0 percent to Rs. 29.33

billion in mid-July 2014 from 26.0 billion in mid-July 2013. The overall CAR of

BFIs in mid-July 2014 was 12.7 percent which was 13.2 percent in previous year

and 16.2 percent in mid-July 2012. NPL of BFIs was slightly increased by Rs.6

billion to Rs. 42.5 billion in mid-July, 2014 which was Rs. 36.0 billion in mid-

July 2013. Almost all banks (except two state-owned banks RBB & NBL)

Executive Summary

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maintained a leverage ratio (Tier 1 capital / (Assets + off B/S Items) higher than 3

percent.

The base rate of all commercial banks has decreased in mid-July 2014 from that

of mid-July 2013. Standard Chartered Bank has minimum base rate of 5.3 percent

while Agriculture Development Bank Limited has maximum base rate of 11.32

percent in mid-July 2014. The overall interest spread of the commercial banks

stood at 4.4 percent and the interest spread of the state owned banks remained 5.1

percent as of mid-July 2014. ADBNL has registered the highest interest rate

spread of 5.9 percent among commercial banks. Civil bank has the lowest interest

rate spread of 3.3 percent in the same period.

Financial access has been increasing with the expansion of network of financial

institutions. As of mid-July 2014, the branch network of commercial banks

reached 1547, followed by 818 branches of development banks and 239 branches

of finance companies.

Over the period, cooperatives have emerged as one of the major pillar of the

economic as well as financial sector of the country. Total of 31,177 cooperatives

are operating throughout the country as of mid-July 2014. Cooperatives have been

mobilizing huge amount of deposits and credits that equals to around 10.0 percent

of total deposits and credits mobilized by NRB regulated financial institutions as

per data of mid-July 2014. Nepalese insurance sector comprises of 25 insurance

companies – 16 non-life, 8 life and one with both life and non-life business. As of

mid-July 2014, total assets/liabilities of insurance companies have shoot up by

24.6 percent in a year to record Rs.101.1 billion. Employee Provident Fund, one

of the mojor contractual saving instituions, has registered a increment of

assets/liabilities by 17.1 percent in year 2013/14 to reach Rs. 170.6 billion, while

CIT, another institution of same type, recored a surge in assets/liabilites by 27.8

percent to Rs. 54.6 billion.

Moving in tandem with global regulatory reforms and introduction of new policy

measures to tackle financial stability, Nepal Rastra Bank introduced new policies

and progrms to this effect. The central bank is taking the necessary measures to

ensure the implementation of Basel III provisions. The bank has developed its

own liquidity monitoring framework for the short-term liquidity monitoring of the

banks. It has developed "Problem Bank Resolution Framework" which spells out


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the detail policies and procedures for identification of problem bank and financial

institutions, intervention efficiency of resolution within the existing legal and

regulatory framework that ensures prompt and effective resolution. Furthermore,

it has recently established a separate division as Problem Bank Resolution

Division (PBRD) for the effective management of problem banks and financial

institutions. NRB is in the process of migration to risk based supervision model

from existing compliance based model. Furthermore, NRB has embarked other

regulatory provision to promote financial stability during the fiscal year 2013/14.

Macroeconomic Development

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CHAPTER - ONE

2 MACROECONOMIC DEVELOPMENT

Global Economic Development

1.1 Economic growth in the first half of 2014 was less than the levels projected

in the April 2014 (WEO, October 2014). WEO states that lesser than

expected growth is the reflection of a number of negative surprises: weaker

U.S. growth (0.8 percent at an annualized rate) with a surprising decline in

activities during the first quarter of 2014; weaker activities in Russia and the

Commonwealth of Independent States (CIS) and slower growth in Latin

America—particularly in Brazil, where investment remains weak and GDP

contracted in the first and second quarter of 2014. Furthermore, stagnant

euro area growth - with an output contraction in Italy, no growth in France

and unexpected weakened growth in Germany in the second quarter;

weaker-than-forecast GDP expansion in Japan and weaker activities in

China in the first quarter combined for the slower growth.

1.2 Global growth is projected to rebound to an annual rate of about 3.7 percent

in the second half of 2014 and into 2015, according to October 2014 issue of

WEO. The strongest rebound in growth is expected in the United States,

whereas the debt-crisis won't let the euro area rise sooner and growth in

Japan will remain modest. Growth in most emerging market and developing

economies is projected to be supported by the waning of temporary setbacks

to domestic demand and production (including from geopolitical tensions);

policy support to demand; the gradual lifting of structural impediments to

growth; and strengthening external demand from advanced economies.

1.3 In the United States, conditions remain in place for a stronger pickup in the

recovery: an accommodative monetary policy stance and favorable financial

conditions, much-reduced fiscal drag (with a cumulative change in the

primary structural balance of some 1.2 percent in 2014–15, compared to 1.5

percent in 2013), strengthened household balance sheets, and a healthier

housing market. As a result, growth is projected to average about 3.0

percent in the second half of 2014 and 2015.


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1.4 In the euro area, a weak recovery is projected to gradually take hold,

supported by a reduction in fiscal drag, accommodative monetary policy,

and improving lending conditions. Likewise, with a sharp compression in

spreads for stressed economies and record-low long-term interest rates in

core countries has affected the growth expectation of this area. Growth is

projected to average 0.8 percent in 2014 and 1.3 percent in 2015, weaker

than the April 2014 WEO projections. In Japan, the pattern of growth in the

first half of 2014 was affected by the April consumption tax hike, which

boosted activities in the first quarter at the expense of the second quarter. In

light of the larger-than-expected contraction in the second quarter, GDP is

projected to increase by 0.9 percent in 2014 which is 0.5 percentage point

less than the April 2014 WEO projections. With private investment expected

to recover, growth is projected to remain broadly stable in 2015,

notwithstanding the planned fiscal adjustment.

1.5 In most of the other advanced economies, including Canada, Norway,

Sweden, and the United Kingdom, growth is expected to be solid. In the

United Kingdom, activity has rebounded and become more balanced, driven

by both consumption and business investment, thanks to improving credit

and financial market conditions and healthy corporate balance sheets.

Growth is projected to average 3.2 percent in 2014 and 2.7 percent in 2015,

about 0.25 percentage point stronger than forecast in the April 2014 WEO.

House prices are increasing at a strong pace, especially in London, and have

also been buoyant in other advanced economies, including Canada,

Norway, Sweden and Switzerland.

1.6 Growth in emerging market and developing economies is projected to

increase modestly in the second half of 2014 and into 2015, supported by

stronger domestic demand as well as a recovery in external demand

associated with faster growth in advanced economies. As in past years,

emerging market and developing economies will continue to account for the

lion‘s share of global growth—even at market exchange rates. Still, the

forecast is some 0.3 percentage point weaker in both 2014 and 2015 relative

to the April 2014 WEO forecast, reflecting both a weaker first-half outturn

for 2014 and an assessment that some of the setbacks appear related to

structural factors and are hence likely to be more lasting.


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1.7 In China, growth projections have been marked down slightly for both 2014

and 2015 relative to those in the April 2014 WEO. After a weaker than

expected first-quarter outturn, the Chinese authorities deployed a number of

policy measures to support activity, including tax relief for small and

medium enterprises, accelerated fiscal and infrastructure spending, and

targeted cuts in required reserve ratios. Growth gained traction in the second

quarter of 2014 on these measures, as well as on stronger exports, and is

projected to average 7.4 percent in 2014, in line with the target. For 2015,

growth is projected to be moderate to 7.1 percent as the economy makes the

transition to a more sustainable path and residential investment slows

further.

Figure 1.1.: World Growth Projections


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1.8 In India, growth is expected to increase in the rest of 2014 and 2015, as

exports and investment continue to pick up and more than offset the effect

of an unfavorable monsoon on agricultural growth earlier in the year.

Furthermore, growth outlook has improved since the last national election,

helped by lower uncertainty and improved business confidence. These

developments have been accompanied by rising capital inflows as well as a

revival in investment and industrial activity. GDP growth appears to have

bottomed out and is forecast to rise to 5.6 percent in 2014, accelerating

further to 6.4 percent in 2015, despite headwinds from ongoing fiscal

consolidation and a tighter monetary stance.

1.9 Growth in the Association of Southeast Asian Nations–5 (ASEAN-5) is

projected at 4.7 percent in 2014, rising to 5.4 percent in 2015. Elsewhere in

emerging and developing Asia, growth is likely to remain strong, helped in

part by favorable financial conditions and broadly accommodative policies.

1.10 Growth for Latin America and the Caribbean is now projected to fall to 1.3

percent in 2014, with a rebound to some 2.2 percent in 2015. Projections


P a g e | 5

have been marked down by more than 1.0 percentage point for 2014 and 0.8

percentage points for 2015, reflecting external factors, given weaker-than

expected export performance amid deteriorating terms of trade, as well as a

variety of idiosyncratic domestic constraints.

1.11 The forecast for the Commonwealth of Independent States has significantly

weakened, reflecting a sharp deterioration in economic conditions in the

first half of the year, which is expected to persist for some time. In Russia,

investment remains weak amid subdued confidence, which is further

affected by geopolitical tensions and sanctions. Activity is not projected to

pick up before 2015. Continued declines in industrial production and

exports will cause a sharp contraction in activity in Ukraine in 2014, with

conditions improving slowly next year. Growth in the rest of the CIS has

already slowed, with weaker trade and remittance flows from Russia, and is

projected to be lower in 2014–15 relative to the April 2014 WEO

projections.

1.12 Growth in emerging and developing Europe is projected to remain close to

3 percent in 2014–15, with an upward revision in projections by 0.4

percentage point for 2014. This revision primarily reflects strengthening

private consumption in Hungary and robust domestic demand in Poland.

With increased strife in some countries in the region, the projected pickup in

growth in 2014 in the Middle East, North Africa, Afghanistan, and Pakistan

region is now projected to be weaker relative to the April 2014 WEO

forecast. Growth is expected to increase in 2015, assuming that security

improves, allowing for a recovery in oil production, particularly in Libya.

Economic activity in the oil importers is projected to improve only

gradually as they continue to deal with difficult sociopolitical transitions,

subdued confidence, and setbacks from regional conflicts.

1.13 In sub-Saharan Africa, growth is projected to remain strong, broadly in line

with the April 2014 WEO projections over the period of 2014–15, although

prospects vary across countries. In South Africa, 2014 growth is being

dragged down by industrial tensions and delays in fixing infrastructure gaps,

including electricity constraints. A muted recovery is expected in 2015. In

contrast, in Nigeria, activity has been resilient despite poor security


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conditions and a decline in oil production earlier this year. In a few

countries, including Ghana and, until recently, Zambia, large

macroeconomic imbalances have resulted in pressures on the exchange rate

and inflation. Beyond the human toll it is exacting, the Ebola outbreak is set

to have an acute impact on the economies of Guinea, Liberia, and Sierra

Leone. Should the outbreak continue to intensify and spread significantly to

neighboring countries, it could have more far-reaching consequences.

1.14 These projections imply a robust outlook for low income developing

countries, with growth projected to exceed 6.0 percent in both 2014 and

2015. Stronger growth in advanced economies will buoy low income

developing countries‘ net external demand, although the projected easing in

nonfuel commodity prices will induce some deterioration in the terms of

trade for the net exporters of commodities. Domestic demand is expected to

remain resilient as in recent years.

Global Inflation

1.15 Inflation generally remains below central bank targets in advanced

economies during 2014-2015, an indication that many of these economies

have substantial output gaps. In the United States, inflation measured with

the personal consumption expenditure deflator is forecast to be 1.6 percent

at the end of 2014 and to rise gradually toward the Federal Reserve‘s

longer-term objective of 2.0 percent.

Figure 1.2: Global Inflation Trends (in percent)


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Box 1.1: RBI Towards Inflation Targeting

The RBI's new policy announcement towards inflation targeting is supposed to be a credit

positive move and is expected, would make monetary policy tools more effective. Under the new

mechanism, the government has mandated RBI to bring down inflation to below 6.0 percent by

January 2016 and then target a level of 4.0 percent by March 2017. It is expected that the new

policy would increase the predictability and effectiveness of RBI‘s monetary policy.

Quantitative inflation targeting as practiced by many central banks will foster transparency and

predictability in monetary policy, as capital market participants, businesses and the public

understand the drivers of central bank actions. Inflation targeting is forward looking. It would

encourage a focus on future, rather than past, price trends. All of this will anchor inflationary

expectations and increase the effectiveness of monetary policy tools in achieving their desired

results and would increase effectiveness of monetary policy. An increase in monetary policy

transparency and effectiveness would lessen volatility in international capital flows into India and

support institutional strengthening via accountability. As the RBI implements its mandate to curb

inflation regardless of its source, the government may heighten efforts to lower food inflation by

reducing inefficiencies in food production, distribution and administered pricing. As per the

recent Monetary Policy Framework agreement between the RBI and the Government, RBI will

target to lower inflation to below 6.0 percent by January 2016 and further to 4.0 percent with a

band of (+/-) 2 percent in 2016-17.

The framework objective to keep inflation in a targeted level will require amending the RBI Act

to act independently on this objective for RBI. The Monetary Policy Framework Agreement binds

the RBI to use monetary policy tools, including fixation of interest rates, to bring down consumer

inflation by 2017. While the agreement gives a free hand to RBI governor to decide on monetary

policy measures to achieve the inflation target, it also requires the RBI to give out to the

government a report in case inflation is more than 6.0 percent or less than 2.0 percent for three

consecutive quarters. If it fails to meet it, the RBI would give out the reasons for its failure,

remedial actions proposed to be taken and an estimated time period within which the given target

would be achieved. The concept of inflation targeting was suggested by a panel headed by RBI

deputy governor Mr. Urjit Patel which recommended transforming RBI to US Federal Reserve

type body with the main objective of capping retail inflation at 4.0 percent with a band of (+/-)

2.0 percent. Similarly, RBI is also require to make public every six months a document explaining

the sources of inflation and the inflation forecast for the period between six to eight months..

The Indian budget for 20115-16 seems as non-inflationary. However, it is believed that achieving

the target of 4.0 percent beyond 2016 is still a tall order and requires structural changes in the

food supply chain to tie down food inflation sustainably. In India, inflation has been trending

down, creating room for lower rates, monetary policy framework brings clarity and gives

definitive direction on interest rates, and quality of fiscal adjustment in the budget is also

favorable to inflation. Despite of all this endeavor by RBI and the government, certain risks in the

current environment that might restrict monetary policy decisions such as the fiscal target of

budget at 3.9 percent is dependent on oil prices remaining range-bound up to 70$/bbl. Likewise,

an increase in oil prices beyond this level and in the subsidy bill could reduce capital expenditure

and compromise the quality of fiscal consolidation laid out. Moreover, volatility in food inflation

due to weather related factors might raise overall inflation. In such a scenario, the Indian

government will need to take strict measures to rein in food inflation in order to meet the RBI

inflation target. Hence, just the inflation targeting mechanism in developing economies,

especially in South Asian countries might not be fully operative without the strong support of

government and with the help of other public policies to achieve the targeted level of inflation.


8 | P a g e

1.16 In the euro area, inflation is projected to increase gradually as the recovery

strengthens and output gaps slowly decrease, to 0.9 percent on an annual

basis in 2015 and 1.2 percent in 2016. But price pressures are expected to

remain very subdued under the current baseline —projections because

persistent output gaps, weak credit conditions, and financial

fragmentation—especially in stressed economies—will combine to contain

prices. As a result, euro-area-wide inflation rates are expected to remain

substantially below the ECB‘s price stability objective through at least 2019

with current policies, suggesting that the risk of inflation expectations

becoming unanchored has increased.

1.17 In Japan, headline inflation is projected to rise to an annual average rate of

2.7 percent in 2014. This rise reflects the consumption tax increase, but

underlying inflation is rising as well, at 1.1 percent this year. Inflation is

projected to increase gradually toward the 2.0 percent target in the medium

term as the output gap closes and inflation expectations rise.

1.18 In emerging market and developing economies, inflation is projected to

decline in 2014, in line with the April 2014 WEO projections, and to remain

broadly unchanged in 2015. The recent decline reflects to an important

extent the softening of commodity prices—particularly those for food

commodities, which have a high weight in the consumer price index baskets

for these countries.

1.19 In, India, high and persistent inflation in economy remains a policy concern

and is projected to decline only gradually, reaching 7.8 and 7.5 percent in

fiscal years 2014 and 2015, respectively.

Crude Oil

1.19 Crude oil prices started to drop from 111.8 dollar a barrel from June 2014 to

reach 87.43 in August. Despite supply disruptions in Iraq, Libya, and Syria,

in addition to the disruptions generated by sanctions against the Islamic

Republic of Iran, the decline was mainly due to strong supply growth in

countries outside the Organization of the Petroleum Exporting Countries

(OPEC), mainly from U.S. shale oil deposits.


P a g e | 9

1.20 Oil production increases in North America—particularly in light tight oil

from shale deposits—have affected global oil trade flows. With increased

domestic production, U.S. net oil imports have dropped from 12.5 million

barrels per day in 2005 to 5.5 million barrels per day to date in 2014.

Domestic Macroeconomic Development

Economic Growth

1.21 The overall macroeconomic situation remained satisfactory in 2013/14.

According to Central Bureau of Statistics (CBS), the real GDP at basic price

grew by 5.2 percent in 2013/14 compared to a growth of 3.5 percent in the

previous year. Improved performance of agriculture and services sector led

to a higher growth in the review year. The growth rate of the agriculture and

the non-agriculture sectors were 4.7 percent and 5.3 percent, respectively in

2013/14 compared to the growth rates of 1.1 percent and 4.6 percent,

respectively in 2012/13. Favorable monsoon and smooth supply of

agricultural inputs such as seed, chemical fertilizer etc. facilitated the better

performance of the agriculture sector in the review year.

20406080

100120140

Jan-2

00

7

May

-20

07

Sep

-20

07

Jan-2

00

8

May

-20

08

Sep

-20

08

Jan-2

00

9

May

-20

09

Sep

-20

09

Jan-2

01

0

May

-20

10

Sep

-20

10

Jan-2

01

1

May

-20

11

Sep

-20

11

Jan-2

01

2

May

-20

12

Sep

-20

12

Jan-2

01

3

May

-20

13

Sep

-20

13

Jan-2

01

4

May

-20

14

Sep

-20

14

Figure 1.3: Monthly Crude Oil Price Movements (in US

dollar/barrel)


10 | P a g e

1.22 The industrial sector grew by 2.7 percent in 2013/14, marginally higher than

in the last year. Despite the energy shortages and various structural

bottlenecks, gradual improvement in industrial labor relation, mainly the

peace and security supported the growth of this sector. Similarly, the service

sector has expanded by 6.1 percent in 2013/14 compared to a growth of 5.2

percent in the previous year. The expansion in the wholesale and retail

trade, hotels and restaurants, transport, storage and communication,

financial intermediaries, public administration and defense, education and

health and social work contributed to the growth of overall service sector in

the review period.

1.23 In 2013/14, the Gross National Disposable Income (GNDI) has grown by

20.4 percent compared to a growth of 12.3 percent in the previous year. The

ratio of total consumption to GDP stood at 91.1 percent in the review year

compared to 89.9 percent in the previous year. In the review year, the ratio

of gross investment to GDP remained at 37.1 percent compared to 36.9

percent in the previous year while the ratio of Gross National Saving to

GDP stood at 46.4 percent compared to 40.3 percent in the previous year.

Inflation

1.24 The annual average consumer price inflation increased by 9.1 percent in

2013/14 compared to an increase of 9.9 percent in the previous year. The

price index of food and beverages group increased by 11.6 percent whereas

the index of non-food and services group increased by 6.8 percent in

2013/14. The indices of food and beverages, and non-food and services had

increased by 9.6 percent and 10.0 percent respectively in 2012/13. Rise in

0.0

2.0

4.0

6.0

8.0

2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/122012/13R2013/14P

Figure 1.4: Growth Rate of GDP

Agriculture Non-Agriculture GDP at basic prices


P a g e | 11

food and beverages group prices was mainly due to the increase in prices of

vegetables, tobacco products, meat and fish, hard drinks and fruits.

Government Finance

1.25 Government expenditure, on cash basis, increased by 15.7 percent to Rs.

415.6 billion in 2013/14 compared to an increase of 12.3 percent to Rs.

359.0 billion in the previous year. An increase in recurrent and capital

expenditure contributed to such a growth of total expenditure during the

review year.

1.26 In 2013/14, government revenue increased by 20.5 percent to Rs. 356.6

billion. A set of factors such as increase in imports and resulting rise in

custom revenue, increase in value added tax and income tax, control in tax

leakage as well as reform in overall revenue administration mainly

contributed to such an increase in revenue mobilization.

1.27 The government budget deficit, on cash basis, remained at Rs. 12.1 billion

in 2013/14. Such deficit was Rs. 31.2 billion in 2012/13. While financing

the deficit, domestic borrowings of Rs. 20.0 billion were mobilized in

2013/14, which is equal to 1.0 percent of the GDP.

1.28 Outstanding domestic debt of the GoN stood at Rs. 201.8 billion in 2013/14.

After adjusting the government cash balance of Rs. 25.2 billion, total

outstanding domestic debt stood at Rs. 176.6 billion in mid-July 2014. GoN

received foreign cash loan of Rs 15.1 billion in 2013/14 compared to Rs. 9.5

billion in the previous year.

7

8

9

10

11

2010/112011/122012/142013/14Jan.-14 Feb.-14Mar.-14April.-14May.-14June.-14July.-14

Figure 1.5: Changes in Consumer Price Index (in percent)


12 | P a g e

External Sector

1.29 Merchandise exports went up by 17.4 percent to Rs. 90.3 billion in the

review year. Such exports had increased by 3.6 percent to Rs. 76.9 billion in

the previous year. The export growth remained high in the review year due

to the increase in exports to both India and other countries. Likewise,

merchandise imports surged by 27.3 percent to Rs. 708.8 billion in the

review year. Such imports were up by 20.6 percent to Rs. 556.7 billion in

the previous year. Merchandise imports surged in the review year mainly

due to the rapid increase in the imports from both India and other countries.

1.30 Due to a large base and high growth rate of imports compared to exports,

total trade deficit surged by 28.9 percent to Rs. 618.5 billion in the review

year. Such deficit had expanded by 23.9 percent in the previous year. Trade

deficit with India surged by 30.8 percent during the review year compared

to a growth of 26.5 percent in the previous year. The share of India in

Nepal's trade increased marginally to 66.6 percent in the review year from

66.0 percent in the previous year.

1.31 The overall balance of payments (BoP) recorded a significant surplus of Rs.

127.1 billion in 2013/14 compared to a surplus of Rs. 68.9 billion in the

previous year. The current account posted a surplus of Rs. 89.8 billion in

2013/14 compared to a surplus of Rs. 57.1 billion in the previous year. The

current account surplus was higher in the review year due mainly to a

substantial rise in remittance inflow, travel income and foreign grants.

Workers‘ remittances rose by 25.0 percent to Rs. 543.3 billion in 2013/14

compared to an increase of 20.9 percent in the previous year. In USD terms,

remittance inflows increased by 12.3 percent to USD 5.5 billion in the

review year compared to an increase of 11.7 percent in the preceding year.

0

100000

200000

300000

400000

500000

600000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 1.6 : Remittance Inflows (in millions)


P a g e | 13

1.32 The gross foreign exchange reserves increased by 24.8 percent to Rs. 665.4

billion in mid-July 2014 from a level of Rs. 533.30 billion in mid-July 2013.

Such reserves had increased by 21.4 percent in the previous year. On the

basis of the trend of imports, the existing level of reserves is sufficient for

financing merchandise imports of 11.5 months, and merchandise and service

imports of 10.0 months.

Exchange Rate

1.33 Nepalese currency, which had been weak compared to the US dollar and

other convertible currencies in early months of 2013/14 due to its peg with

Indian rupee, remained fairly stable during the later months of the fiscal

year. Nepalese currency depreciated against US dollar by 0.9 percent in

mid-July 2014 from the level of mid-July 2013. It had depreciated by 6.7

percent in the corresponding period of the previous year. The exchange rate

of one US dollar stood at Rs. 95.9 in mid-July 2014 compared to Rs. 95.0 in

mid-July 2013.

Monetary Situation

1.34 In 2013/14, monetary expansion remained at higher level as compared to the

previous year due to significant surplus in BoP. Broad money supply (M2)

increased by 19.1 percent in 2013/14 compared to a growth of 16.4 percent

in the previous year. The higher growth of broad money supply was on

account of increase in the growth rate of net foreign assets of the banking

sector in the review year. Similarly, narrow money supply (M1) increased

by 17.7 percent during the review year compared to a rise of 14.4 percent in

the previous year.

70

90

110

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

Figure 1.7: Exchange Rate Movement of NRs. with

US Dollar

2011/12 2012/13 2013/14


14 | P a g e

1.35 Domestic credit increased by 12.6 percent in the review year compared to a

growth of 17.2 percent in the previous year. A slower growth of domestic

credit in the review period was due to decrease in net claims on government.

The claims on the private sector increased by 18.3 percent in the review

year compared to 20.2 percent growth in the previous year.

1.36 Reserve money surged by 23.3 percent in the review year compared to an

increase of 10.9 percent in the previous year. Increase in NFA of Nepal

Rastra Bank contributed to such a higher growth of reserve money in the

review year.

Liquidity Management

1.37 Excess liquidity been prevalent in the banking system from FY 2013/14 due

to higher deposit mobilizations and low credit flow, resulting from the

higher level of remittance inflows and net services income. Considering the

likely pressure on inflation from monetary expansion as reflected by low

short-term interest rates, excess liquidity of BFIs was mopped up through

open market operations (OMOs) in the review year. NRB Open Market

Operation Bylaws, 2014 was also brought into implementation in order to

implement OMO effectively.

1.38 In 2013/14, the NRB injected net liquidity of Rs. 343.5 billion through the

net purchase of USD 3.52 billion from foreign exchange market

(commercial banks). Net liquidity of Rs. 285.0 billion was injected through

the purchase of USD 3.2 billion in the previous year.

0

500

1000

1500

2000Figure 1.8: Growth in Money Supply (in billion Rs.)

Narrow Money (M1) Broad Money (M2)


P a g e | 15

1.39 The NRB purchased Indian currency (INR) equivalent to Rs. 308.0 billion

by selling USD 3.1 billion in the review year. INR equivalent to Rs. 274.4

billion was purchased by selling USD 3.1 billion in the previous year.

1.40 Excess liquidity in BFIs was mopped up through OMOs in the review

period. The NRB mopped up net liquidity of Rs. 602.50 billion through

reverse repo auctions and Rs. 8.5 billion through outright sale auctions in

the review year. A net liquidity of Rs. 8.5 billion was mopped up through

outright sale auctions in the previous year.

16 | P a g e


Financial System Performance and Stability

P a g e | 17

CHAPTER - TWO

3 FINANCIAL SYSTEM PERFORMANCE AND STABILITY

Global Financial Stability Perspectives

2.1 The global economic recovery continues to rely heavily on accommodative

monetary policies in advanced economies (GFSR, 2014 October).

Accommodative policies aimed at supporting the recovery and promoting

economic risk taking have facilitated greater financial risk taking, in the

form of increased portfolio allocations to riskier assets and increased

willingness to leverage balance sheets. Thus, accommodative monetary

policies face a trade-off between the upside economic benefits and the

downside financial stability risks.

2.2 The Global Financial Stability Map indicates that the locus of risks has

shifted because an increase in risk appetite has driven the search for yield

and pushed up market and liquidity risks(GFSR, 2014 October). Credit risks

in the global financial system have declined, reflecting favorable funding

conditions and improved asset quality. The same report depicts that the

global banking system is now better capitalized than at the onset of the

financial crisis in 2008, due to adoption of better regulatory initiatives.

Figure 2.1: Global Financial Stability Map (GFSR, April 2014)


18 | P a g e

2.3 Accommodative monetary policies in advanced economies have facilitated

balance sheet repair and increased economic risk taking, contributing to a

brighter outlook for capital expenditure, especially in Japan, the United

Kingdom, and the United States. In contrast, such accommodative policies

may be causing too much financial risk taking, as reflected in compressed

credit spreads, low volatility, and asset prices that are both elevated and

highly correlated. Corporate leverage in the United States has risen, and

default cushions have eroded in lower-rated segments of high-yield

corporate bond markets as underwriting standards have weakened.

2.4 In emerging markets, strong investor risk appetite has fueled corporate

borrowing at low spreads, while bond issuance continues to grow rapidly.

Overall, in the absence of a large adverse shock, leverage does not yet

appear to be at critical levels across companies in emerging markets, but

corporate vulnerabilities are more pronounced in China.

2.5 One of the major concerns after the global financial crisis has been directed

toward the regulation of shadow banking. The Financial Stability Board

(FSB) has been engaged since 2011 in a global project to monitor and

measure shadow banking, and to adapt the regulatory framework to better

address shadow banking risks. The global financial crisis revealed that,

absent adequate regulation, shadow banking can put the stability of the

financial system at risk in several ways. According to GFSR, the shadow

banking amounts to between 15 and 25 trillion US dollars in the United

States, between 13.5 and 22.5 trillion in the euro area, and between 2.5 and

6 trillion in Japan—depending on the measure— and around 7 trillion in

emerging markets. In emerging markets, its growth is outpacing that of the

traditional banking system.

NEPALESE FINANCIAL SYSTEM: AN OVERVIEW

Size of the Overall Financial System

2.6 Nepalese financial system has been regulated by different independent

regulators in the sectors of banking, insurance, securities markets,

contractual saving institutions and other service sectors. In the system,

NRB, as the central bank, regulates commercial banks, development banks,

finance companies, micro finance financial institutions, FINGOs and


P a g e | 19

cooperatives carrying limited banking activities. Besides this, NRB has

made provisions to allow companies to work as hire purchase companies

with pre-approval from NRB and NRB itself is responsible to regulate and

supervise hire purchase companies (HPCs)1.The contractual saving

institutions comprises of Employee Provident Fund (EPF) and Citizen

Investment Trust (CIT) operating under the regulatory jurisdiction of

Ministry of Finance. Similarly, Security Board of Nepal (SEBON) is acting

as the regulator of the securities market which comprises of NEPSE, CDS

&Nepal Clearing House Limited (NCHL) and merchant banks. ICRA Nepal

is the only credit rating agency operating in Nepal under the purview of

SEBON. The financial system also embraces insurance companies under the

purview of Insurance Board and cooperatives established under Cooperative

Act under the purview of Department of Cooperatives.

2.7 A high level committee to enhance financial stability through improved

coordination between regulators, comprising NRB, SEBON, Insurance

Board, Department of Cooperatives, office of the Company Registrar has

been recently established. The financial sector is continuously evolving

towards a more contemporary and efficient system of finance with

supportive investment-friendly environment, and inclusive economic

growth.

2.8 Due to financial liberalization policy adopted after the mid of 1980s, Nepal

observed the rapid growth in number of BFIs in the last couple of decades

and the growth has moderated as NRB has imposed moratorium on

licensing on BFIs except micro credit development banks. For the last two

years, banking system of Nepal is experiencing an encouraging restructuring

and consolidation, particularly through the merger and acquisition. As of

mid-July 2014, the total number of financial institutions stood at 276

comprising of 204 BFIs of ―A‖, ―B‖, ―C‖ and ―D‖ categories, 44 other

financial intermediaries licensed by the NRB, 25 insurance companies and

one each of EPF, CIT and Postal Saving Bank. Total number of "A", "B",

"C" and "D" class financial institutions decreased to 204 in mid-July 2014

from 206 in mid-July 2013 as significant increase in number of micro

finance financial institutions (―D‖ Class) by 12.9 percent has contributed to

such an increase in total number of BFIs despite decline in the number of

1 For details see document available at www.nrb.org.np


20 | P a g e

―A‖ and ―C‖ class BFIs due to merger process. However, the number of "B"

class financial institutions reached to 84 in mid-July 2014 from the 86 in

mid-July 2013.

Table 2.1: Number of BFIs and Other Institutions

Banks and Financial

Institutions

Mid-July

2012

Mid-July

2013

Mid-July

2014

Commercial Banks 32 31 30

Development Banks 88 86 84

Finance Companies 70 58 53

Micro Finance Financial

Institutions (MFFIs) 23 31 37

Sub-Total 213 206 204

NRB Licensed Cooperatives

(with limited banking activities) 16 16 15

NRB Licensed FINGOs

(with limited banking activities) 34 31 29

Insurance Companies 25 25 25

Contractual Saving Institutions

Employees Provident Fund

(EPF)

1 1 1

Citizen Investment Trust (CIT) 1 1 1

Postal Saving Bank 1 1 1

Total 292 282 276

2.9 In terms of total assets and liabilities, banks and financial institutions shared

87.9 percent of total financial system of Nepal in mid-July 2014. Such share

stood 11.3 percent for the contractual saving institutions. In terms of share

in total assets, the commercial banks remained the key player in the

financial system occupying 50.8 percent of the system's total assets followed

by NRB (22.7 percent), development banks (8.8 percent) and finance

companies (3.7 percent). In case of contractual saving institutions, on the

same basis, EPF is a dominant institution having 5.9 percent of shares,


P a g e | 21

followed by CIT (1.9 percent), insurance companies (3.5 percent) and postal

saving banks (0.1 percent) as of mid-July 2014. The share of MFFIs

including the saving and credit cooperatives accounted for 2.6 percent

including 1.7 percent of MFFIs, 0.2 percent of micro-credit non-government

organizations (FINGOs) and 0.7 percent of saving and credit cooperatives

permitted by the NRB to undertake limited banking transactions.

2.10 In the Nepalese financial system, BFIs have the prominent share of assets

and among which commercial banks have the highest share in total assets.

As evident from the figure 2.3, the assets size of financial system is

increasing over the years. The total share of banking and non-banking

financial institutions in GDP continued to expand in the mid-July 2014

compared to the previous year presented in the figure 2.4. The ratio of total

assets & liabilities of Nepalese financial system reached 149.7 percent of

GDP in mid-July 2014.

100.00

110.00

120.00

130.00

140.00

150.00

160.00

1500.00

1700.00

1900.00

2100.00

2300.00

2500.00

2700.00

2900.00

Mid-July 2011 Mid-July 2012 Mid-July 2013 Mid-July 2014

Figure 2.3: Total Assets (in Rs. billion) and Assets to GDP

Ratio Growth

Total Assets Percentage of GDP (LS)

22.70%

50.82%

8.85%

3.66%

1.70%

0.20%5.91%

1.89%3.50%

0.10% 0.70%

Figure 2.2: Structure of Assets Holding in Financial

System Nepal Rastra Bank

Commercial Banks

Development Banks

Finance companies

MFFIs

FINGOs

EPF

CIT

Insurance Companies

Postal Saving Banks

NRB regulated Cooperatives


22 | P a g e

Total assets and liabilities of commercial banks remained at 76.1 percent of

GDP followed by the NRB (34 percent), development banks (13.2 percent),

finance companies (5.5 percent), MFFIs (2.6 percent), cooperatives (0.9

percent), and FINGOs (0.3 percent). Further, such ratio for contractual

saving institutions stood at 16.8 percent comprising 8.8 percent of EPF, 2.8

percent of CIT, 5.2 percent of insurance companies and 0.1 percent of postal

saving bank.

0

10

20

30

40

50

60

70

80

90

Mid-July

2011

Mid-July

2014

Figure 2.5: Growth in Assets to GDP ratio (in percent)

0

200

400

600

800

1000

1200

1400

1600

Figure 2.4: Growth in Total Assets (in billion Rs.)

Nepal Rastra Bank

Commercial Banks

Development Banks

Finance companies

MFFIs

FINGOs

EPF

CIT

Insurance Companies

Postal Saving Banks

NRB regulated Cooperatives


P a g e | 23

Structure and Performance of Banks and Financial Institutions

2.11 Nepalese banking system in terms of number and structure changed

significantly since 1985. The establishment and growth of number of BFIs

reached its peak in 1995 to 38 from only 3 BFIs till 1985. The impact of

economic liberalization and its direct impact on the financial sector have

been observed in that period in terms of establishment of banks and

financial institutions. Thereafter along with the pace of financial

liberalization, the establishment of BFIs took its speed each year and the

number of BFIs reached to 218 in 2011. While the global financial system

was deeply ridden in a risk with the financial crisis, Nepalese financial

institutions were rapidly emerging with the argument and support that Nepal

would not get affected by such crisis as economy is not exposed to

international financial markets.

2.12 The pace of establishment of BFIs halted after licensing for BFIs (A, B, C)

kept on moratorium from NRB. In the recent years, the central bank has

adopted the policy of merger and acquisition to support its objectives of

reducing the number of BFIs in Nepalese financial system. A stable

financial system is determined by a sound and strong banking system as it

shares a greater percentage in the national economy of many countries

globally. Nepal cannot be separated from that universal landscape of

financial, however, in the past it lacked clear vision and strategies and it is

expected that recently drafted financial sector development strategies, the

amendments of BAFIA and NRB Act as well as related laws and

legislations would fulfill all shortcomings related to the financial structure

and adopt a long term financial sector vision and strategies with concrete

policies/actions without changing the regulatory regime in a short period of

time.

-50%0%50%100%150%200%250%300%350%400%450%500%

0

50

100

150

200

250

300

1985 1990 1995 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Figure 2.6: Number and growth of BFIs licensed by

NRB

NGOs Limited banking Coop.

"D" class "C" class

"B" class "A" class


24 | P a g e

2.13 The banking sector of Nepal has expanded at a rapid pace after financial

liberalization policy adopted after mid of the 1980s, but the size of economy

did not expand in comparison to the expansion of the banking sector. The

regulator and supervisor of the banking system was not able to develop and

expand its capacity to supervise those BFIs during that period nor was able

to conduct any research and studies about the future of Nepalese banking

sector stability and its direction. The unwanted adverse impact was straight

forward as supposed in the financial sector and it was experienced since

2010, as many BFIs get started to be in trouble and unable to return the

public deposit and many more BFIs get affected adversely from the

excessive exposure to short term real estate financing as well as lack of

good corporate governance during that period.

2.14 The main characteristics of Nepalese financial system can be explained by

lack of good corporate governance, inadequate risk management practices,

high real estate credit exposure, and compliance based supervision with lack

of supervisory resources, loan ever-greening practices by BFIs. Similar,

with the huge expansion in banking sector, NRB is facing challenges in

allocation of its limited resources for risk-based supervision.

Assets Structure of Nepalese Banking System

2.15 The total assets and liabilities of BFIs have continued to increase. As of

mid-July 2014, total assets of BFIs increased by 18.96 percent to Rs. 1877

billion in comparison to the same period of last year. Though the licensing

policy of BFIs is in moratorium, there is significant expansion on the

balance sheet of BFIs mainly due to the increase in deposits and credits.

Increase in deposits is mainly driven by ever increasing remittance inflows.

The liabilities side of the balance sheet may also inflated on account of the

increasing paid up capital through issuance of right shares and bonus share

to meet their minimum regulatory capital. Similarly, government has

injected a large chunk of capital in state owned banks.


P a g e | 25

2.16 As on mid-July 2014, the five large commercial banks (LCBs) collectively

accounted for 27.0 percent of total banking system assets and 34.6 percent

of total commercial bank assets. In the same period, there was decrease in

3.0 percentage points on the share of LCBs assets on total assets size from

mid-July 2011. As of mid-July 2014, the five large commercial banks, RBB,

ADBNL, NABIL, NIBL and NBL had total assets size of Rs. 130.1 billion,

Rs. 108.38billion, Rs. 93.76 billion, Rs. 91.98 billion and Rs. 83.3billion

respectively. Compared with other countries, the assets in banking sector of

Nepal are not concentrated to few large banks.

2.17 The share of loans and advances is the largest among assets, but it slightly

decreased in mid-July 2014 from mid-July 2011, and the share of

investment in government and other securities has also decreased by 0.6

percentage points on the same period. The loans and advances as

percentage of total assets have decreased mainly because of reduced

business confidence and decrease in investment in government securities is

due to lower yields in those securities.

Credit Concentration in the Banking sector

2.18 A large part of BFIs lending is concentrated in eight key areas of economic

activities. As on mid-July 2014 trade (wholesaler & retailer) accounted for

21.6 percent of bank lending, followed by manufacturing (19.7 percent),

construction (10.5 per cent), real estate (8.0 percent), consumption (7.7

percent), agriculture and forestry (4.3 percent) and transportation and

25

26

27

28

29

30

31

0200000400000600000800000

100000012000001400000160000018000002000000

mid-July, 2011 mid-July,2012 mid-July,2013 mid-July,2014

Figure 2.7: Total Assets of Banking System (in million

Rs.)

Total assets of BFIs Assets share of the 5 LCBs (right scale)


26 | P a g e

communication (3.9 percent). Concentration of lending to a few sectors or

customers would expose a bank to credit risk in the event of a crisis

associated with one sector or a customer, affecting the recoverability of a

large share of the loan portfolio. Hence, BFIs should closely monitor the

potential credit risk associated with key sectors, given the high NPL ratios

reported in respect of several key areas of economic activity.

Herfindahl-Hirschman Index for determining Loan Concentration

2.19 The calculated Herfindahl-Hirschman Index (HHI)2 of 1315 points shows

moderate sectoral concentration of loans in the banking system. Though

there are some changes in classification category in defining some sectors,

the data still reveal that the banking sector loans are concentrated within a

few sectors during the review period. In particular, wholesaler and retailer

show a 21.6 percent concentration of the total loan portfolio, followed by

manufacturing sector and construction sector with a share of 19.7 and 10.5

percent respectively. The index value calculated below in Table 2 .2 is

slightly higher compared with that of previous year 2013 when HHI was

1304. The level of HHI, calculated below in Table 2.2 shows moderate

concentration for the Nepalese banking system as it is quite distant from the

upper limit of moderate concentration, i.e., HHI of 1800.

Table 2.2: Sector-wise loans concentration (As of mid-July, 2014)

S.N. Sector Amount (in Rs.

Millions)

Percent of

Total HHI*

1 Agricultural and

Forest Related 48152.08 4.26 18.16

2 Fishery Related 2747.06 0.24 0.06

3 Mining Related 3580.05 0.32 0.10

4 Manufacturing

(Productive) Related 222489.70 19.69 387.81

5 Construction 118632.87 10.50 110.26

2HHI index with the result of less than 1,000 is regarded as no concentration of

loans is the banking system; a result of 1,000-1,800 to be a moderately

concentrated; and a result of 1,800 or greater to be a highly concentrated

banking system.


P a g e | 27

S.N. Sector Amount (in Rs.

Millions)

Percent of

Total HHI*

6 Electricity, Gas and

Water 25606.61 2.27 5.14

7 Metal Products,

Mach. & Ele. Eqp. 13994.97 1.24 1.53

8 Tras., Com. and

Public Utilities 43707.55 3.87 14.97

9 Wholesaler &

Retailer 243966.15 21.59 466.29

10 Finance, Insurance

and Real Estate 90353.77 8.00 63.96

11 Hotel or Restaurant 32909.63 2.91 8.48

12 Other Services 54154.23 4.79 22.98

13 Consumption Loans 87003.21 7.70 59.30

14 Local Government 1182.73 0.10 0.01

15 Others 141309.64 12.51 156.44

Total loans and

Advances 1129803.67 100.00 1315.48

Real Estate Lending

2.20 The real estate market is moving toward the direction as intended by

stringent policies measures adopted by NRB over the last few years. NRB

has already deployed several macro prudential measures to address real

estate lending such as caps on real estate loans and the loan-to-value ratio

and sectoral capital requirements. NRB has directed BFIs to limit real estate

and housing loan exposure to 25 percent of their total loans. The BFIs are

also required not to issue loans of more than 60 percent of fair market value

of the collateral/project. As for the real estate sector (which does not include

the housing sector) the central bank has asked the lending banks to reduce

exposure to 10 percent. But, NRB has given some relaxation to loan floated

to residential home loan whereby BFIs can lend up to Rs. 10 million for

individual residential home loan.


28 | P a g e

2.21 The banking system is in the process of recovery from high exposures in

real estate. The direct real estate exposure amounted to Rs. 82 billion which

accounts for 15.2 percent of total loan in mid-July 2014 which was about

Rs. 92 billion (18.2 percent of the total outstanding) in mid-July 2013.

Comparatively, such real estate loan was about 23.8 percentage of total loan

before the ceiling on such loan.

2.22 Commercial bank‘s direct exposure to real estate and housing has declined

from 19.4 percent in FY 2009-10 to 13.9 percent in mid-July 2014. Indirect

exposures through collateral of land and buildings have also declined from

71.7 percent to 64.0 percent over the same period. The development banks

and finance companies have even higher exposure to real estate and

housing. The developments banks and finance companies have so far lent

18.3 and 26.2 percentage of total loans in mid-July, 2014.

2.23 In mid-July 2014, only three commercial Banks had exposures to real estate

in excess of 20 percent against 6 commercial banks in mid-July 2013. The

situation was even worse in mid-July, 2012 as 13 commercial banks (40

percent of the total system) had real estate exposure of more than 20 percent

of their total loan portfolio. The total real-estate-loan-to-GDP ratio was 8.9

percent, 9.0 percent and 9.2 percent in mid-July 2014, mid-July 2013 and

mid-July 2012 respectively.

051015202530

0.0

20000.0

40000.0

60000.0

80000.0

100000.0

2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014

Mid-July Mid-July Mid-July Mid-July

Class "A" Class "B" Class "c" Total

Figure 2.8: Real Estate Exposures of BFIs (in million Rs.)

Res. Per. H. Loan (Up to Rs. 10 mil.)

Real Estate Loan

Share of Real Estate Loan and housing loan inTotal Loan in % (right scale)


P a g e | 29

Progress on Directed Lending: Productive Sector Lending &

Deprived Sector Lending

2.24 In order to achieve the sustainable economic growth of the country, NRB

has directed BFIs to lend in productive sector. Currently, such directed

lending is focused on productive sector and deprived sector. NRB has issued

directives to BFIs to lend certain percentage of their total loan portfolio in

such lending. Accordingly, class ―A‖ commercial banks are required to lend

20 percent of their total loan on productive sector like agriculture, energy,

tourism, cottage and small industry among which they are required to make

at least 12 percent of their loan in agriculture and energy sector by mid-July,

2014. Likewise, class ―B‖ and ―C‖ BFIs are required to lend 15 percent and

10 percent respectively on productive sectors. The main objective of this

policy is to encourage the BFIs to float the loan in productive sector and

decrease their lending in unproductive sector which also helps BFIs to

minimize their credit risk. Due to various policies adopted by NRB to

increase the exposures on these sectors, the total loan floated on these

sectors has been increased significantly over the years.

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

2012 2013 2014 2012 2013 2014 2012 2013 2014 2012 2013 2014

Mid-July Mid-July Mid-July Mid-July

Class "A" Class "B" Class "c" Total

Figure 2.9: Indirect Real Estate Exposures of BFIs (in

million Rs.)

Loan Against Collateral of Fixed Assets (in Million Rs.)

Share of Loan Collateralised by Fixed assets in percent (right scale)


30 | P a g e

2.25 The monetary stance of NRB is designed to ensure that the credit envelope

would be sufficient for productive investments to support the attainment of

the government‘s GDP growth target. In domestic financial markets, active

management of liquidity by the NRB should ensure adequate flow of credit

to the productive sectors. As on mid-July 2014, the commercial banks had

provided 12.3 percent of their total loan on productive sector which includes

8 percent of their total loan in agriculture and energy (figure 2.11). Thus, as

evident from figure, commercial banks are still below regulatory

requirements of NRB on productive sector.

2.26 With the objective of enabling the poor people to access credit for self-

employment as a poverty alleviation strategy, NRB made BFIs mandatory to

lend certain percentage of their total lending in deprived sector. The

provision was made where commercial banks, development banks and

finance companies should lend 4.5 percent, 4 percent and 3.5 percent

respectively by mid-July 2014. As on mid-July 2014, BFIs total lending on

deprived sector increased by 30.4 percent to Rs. 52.8 billion which was Rs.

40.5 billion in mid-July 2013 (figure 2.11). The overall deprive sector

lending by BFIs as on mid-July 2014 was 5.1 percent where commercial

banks, development banks and finance companies lend 5.2 percent, 5.4

percent and 3.5 percent respectively which shows BFIs lending on this

sector is above minimum regulatory requirement.

0

10

20

Agriculture Energy Tourism CSI Productive

Sector

Total

5.8

2.22.8

1.6

12.3

Figure 2.10: Share of Commercial Banks in Productive

Sector Loan (in percent)


P a g e | 31

Liability structure of the banking sector

2.27 Deposits are the largest source of external funds in the banking sector. The

share of total deposits was 88.6 percent of the total liabilities as of mid-July

2014. As of mid-July 2014, total deposit increased by 18.2 percent against

16.7 percent in mid-July 2013. Likewise, borrowings from NRB, other

banks and FIs decreased by 32.6 percent (contrasted with an increase of

51.6 percent in mid-July, 2013), whereas other liabilities increased by 17.4

percent compared to mid-July 2013. The share of saving deposits was 39.8

percent of total deposits, whereas the shares of savings deposits, call

deposits, current deposits, and other deposits were 30.7 percent, 19.3

percent, 8.7 percent and 1.5 percent respectively of total deposits at mid-

July 2014. The relative proportions of deposits remain similar as in previous

year. The deposit structure shows a greater reliance on saving deposits and

fixed deposits which are regarded as more stable and it contributes to

financial stability.

0%

1%

2%

3%

4%

5%

6%

0

10000

20000

30000

40000

50000

60000

mid-July, 2012 mid-July, 2013 mid-July, 2014

Shar

e in

to

tal

loan

Am

ount

(in M

illi

on)

Figure 2.11 Deprived Sector Lending by BFIs

A' Class B' Class C' Class

Total BFIs A' Class (right scale) B' Class (right scale)

C' Class (right scale) Total BFIs (right scale)


32 | P a g e

2.28 Among the total deposits of BFIs Rs. 1477 billion was posted in mid-July

2014, the share of top five BFIs is 26.5 percent of the total deposits which

shows there is significant concentration of top 5 BFIs in the total system in

terms of deposit. The concentration ratio was similar in previous year as

well. Among top five banks, there are three state owned commercial banks

and remaining two are joint venture commercial banks.

Financial Soundness Indicators

Capital Adequacy

2.29 In 2014, the capital fund of BFIs increased by Rs. 14.1 billion to Rs 4749.6

billion. The fund is composed of paid-up capital of Rs. 129 billion, statutory

reserves of 32.7 billion, and retained earnings of Rs.27 billion in negative

figure and other reserves of Rs. 11.4 billion. In mid-July 2014, the CAR of

commercial banks registered at 12.0 percent, with a y-o-y decrease of 0.3

percent point. In the same period, the CAR of development banks recorded

15.6 percent, with a y-o-y decrease of 2.2 percentage points and the CAR of

finance companies was 15.9 percent, which was again decrease by 0.2

percent point y-o-y. The overall CAR of BFIs in mid-July 2014 was 12.7

percent which was 13.2 percent in previous year and 16.2 percent in mid-

July 2012. The deteriorating capital adequacy of banking system was due to

negative retained earnings of BFFIs. However, the overall CAR of BFIs

remained well above the standard requirements set by NRB which indicates

that the financial sector is well capitalized.

Source: NRB

0200000400000600000800000

1000000120000014000001600000

Figure 2.12 Liability in Banking

Sector (in million Rs.)

2011 2012 2013 2014

8.7%

39.8%

30.7%

19.3%

1.5%

Figure 2.13 Deposit Liabitities

by types of Account

Current

Deposits

Savings

Deposits

Fixed

Deposits

Call

Deposits

Others

Deposits


P a g e | 33

2.30 In mid-July 2014, the proportion of commercial banks compliant with the

minimum Capital Adequacy ratio (CAR) is 87 percent in comparison 94

percent as on mid-July 2013. As evident from figure 2.14, only 4 banks

were non-compliant with the minimum CAR whereas 26 banks were

complaint with CAR in mid-July 2014. In an average 92 percent of

commercial banks were compliant with minimum CAR in the period of

mid-July 2011 to mid-July 2014. During the period of 2011-2014, in most

of the years, (2011, 2012, 2013) state owned banks (SOBs) Nepal Bank

Limited (NBL) and Rastriya Banijya Bank (RBB) are only two commercial

banks which are non-complaint with prescribed CAR and in 2014 one

private commercial bank Grand Bank Limited (GRBL) was also non-

compliant with prescribed CAR along with those two SOBs.

2.31 The aforesaid analysis highlights that the Capital adequacy ratios of

commercial banks are higher than regulatory standard along the period of

mid-July 2011 to mid-July 2014, as the evident from the percentage of CAR

and core capital during those period and both ratios are in increasing trend

which is depicted in chart 6.2. For instance, overall CAR of the commercial

banks in mid-July 2014 is 12.0 percent which was 10.6 percent in mid-July

2011. In addition, Tier-1 ratios were 9.1 percent, 10 percent, 10.7 percent

and 10.4 percent in mid-July 2011, 2012, 2013 and 2014 respectively. This

increase in industry level CAR and Tier-1 Capital could be due to increase

in capital regulatory stance of NRB.

0

5

10

15

20

25

020000400006000080000

100000120000140000160000

A B C

Over

all A B C

Over

all A B C

Over

all

mid-July, 2012 mid-July, 2013 mid-July, 2014

Figure 2.14: Capital Fund (in Million Rs.), CAR and

CCAR (in percent) of BFIs

CAPITAL FUND CAR (right scale) CCAR (right scale)


34 | P a g e

Asset Quality

2.32 Non-performing loans (NPL)3 emanated from the deterioration in the quality

of the loan portfolios which was expected to emerge due to the rapid growth

of credit in recent years. Indeed, NPL of BFIs was slightly increased by Rs.6

billion to Rs. 42.5 billion in mid-July, 2014 which was Rs. 36.0 billion in

mid-July 2013. However, in terms of ratio of NPL to total loans, the

banking sector showed stable assets quality and sufficient provisions during

the period of 2012-2014. NPL to total loans of commercial banks was

decreased by 0.04 percentage point y-o-y basis to 3.8 percent on mid-July,

2014. Individual NPLs to total loan ratios of majority of the commercial

banks are below 5 percent. However, two SOBs and other two private sector

banks have NPL above 5 percent. Likewise, NPL ratio of development

banks was decreased by 0.04 percentage points to 4.2 in mid-July, 2014 as

compared to mid-July 2013. The NPL ratio of finance companies is still in

double digit which stands at 14.3 percent in the same period.

3Non-performing loans are those loans which are classified as ‗sub-standard‘, ‗doubtful‘, ‗loss‘ and

restructured/rescheduled as per NRB unified directive, directive no. 2.

2425262728293031

02468

101214

July, 2011 July, 2012 July, 2013 July, 2014

Figure 2.15 : Capital toTier-1 ratio and overall CAR

(RS) of the Commercial Banks (in percent)

Tier 1 ratio Overall CAR

No. of core capital compliant banks No. of CAR compliant banks


P a g e | 35

2.33 The provisions for NPL stood at Rs.47.9 billion in mid-July 2014; 6 billion

more than that of mid-July 2013. As of mid-July 2014, LLP of banking

system is sufficient to cover NPL of the same period.

2.34 In the banking system, the loss loan is Rs. 28.5 billion in mid-July 2014

which was slightly decreased from Rs. 25.7 billion in mid-July 2013 ratio of

loss loan to total NPL. More than three fourths of total NPL (67 percent of

NPL) in mid-July 2014 is loss loan. It is alarming that a bulk of NPL were

loss loan. The decrease in ratio of loss loans to NPL to 67 percent in mid-

July 2014 from 72 percent in mid-July 2013 shows improvement in the

assets quality in banking system. As per the directive of NRB, BFIs are

required to make provisions of 100 percent of the loss loans, decrease in the

amount of loss loan helps to keep banks in comfortable position with regard

to capital and profitability. The NPL under sub-standard and doubtful

categories, on the other hand, constituted 12 percent and 15 percent

respectively. The ratio of restructured/rescheduled loans to total NPL

remained 5 percent in the current year.

0

2

4

6

8

10

12

14

16

18

A B C

Over

al A B C

Over

al A B C

Over

al A B C

Over

al A B C

Over

al A B C

Over

al

mid-Jan, 2012 mid-

July, 2012

mid-Jan, 2013 mid-

July, 2013

mid-Jan, 2014 mid-

July, 2014

Figure: 2.16: NPL ratio and LLP ratio of BFIs (in percent)

LLP/TL NPL/TL


36 | P a g e

2.35 The adverse effect on bank balance sheets arising out of high classified

loans is a major concern for the central bank. NRB‘s directives to the banks

to take precautions while extending loans to high risk sectors, keeping

single obligor limit, and prioritize loans to productive sectors, and also

blacklisting the loan defaulters and similar other measures should help to

further improve the classified loans situation in the country.

Leverage Ratio

2.36 BCBS has introduced leverage ratio which is complementary to the risk-

based capital framework and aims to restrict the build-up of excessive

leverage in the banking sector. The leverage ratio is defined as eligible Tier

1 capital divided by total assets and off balance sheet items which could

originate pro-cyclicality that can originate from excessive lending that are

inappropriate to measure risk weighted assets. A low ratio indicates a high

level of leverage. To reduce pro-cyclicality and keep leverage ratios more

stable the Basel III has set a minimum leverage ratio of 3 percent at all

times, which will take effect from January 2015.

5% 17%

16%

72%

Mid-July 2014

5%17%

16%72%

Mid-July 2013

Restructured /

Rescheduled

Sub-standard

Doubtful

Loss

Figure 2.17: NPL composition of BFIs


P a g e | 37

2.37 In Nepalese context, there is no practice of regulatory monitoring of the

leverage ratio. As evident from the chart 6.3, Nepalese commercial banks

are better than the minimum proposed limit by Basel II. In mid-July, 2014

and 2015 almost all banks (except two state-owned banks RBB&NBL)

maintained a leverage ratio (Tier 1 capital/ (Assets + off B/S Items) higher

than 3 percent. In mid-July 2014, out of 30 commercial banks, 25 banks had

a leverage ratio higher than 3 percent but less than 10 percent; four banks

had leverage ratios higher than 10 percent.

Credit and Deposit Growth

2.38 Credit flows from Commercial Banks declined significantly to 19.1 percent

in mid-July 2014 from 21.6 percent in mid-July 2013 and 24.5 percent in

mid-January 2013. However, deposits saw a meager increment of 18 percent

in mid-July, 2014 from 17.6 percent in mid-July 2013. There has been a

sharp decline in deposit growth from 26.2 percent in mid-July 2012 to 18

percent in mid-July 2014. Development banks had higher credit and deposit

growth in overall growth during the period. The overall credit growth in

mid-July 2014 is 18.2 percent which is decreased by 2.8 percentage points

from 21 percent in mid-July 2013 which reveals the fact that the credit

growth of BFIs has decreased. There has been negative growth of deposits

and credits in finance companies because of the merger and up-gradation to

developments bank.

2

8

16

4

12

1312

3

0

2

4

6

8

10

12

14

16

18

>3% 3%->7% 7%-10% 10%-15% <15%

No

. o

f B

anks

Figure 2.18: Leverage ratio of Commercial Banks

Mid-July 2013 Mid-July 2014


38 | P a g e

2.39 The credit to deposit(C/D) ratio at the aggregate level remained unchanged

around 76.5 percent in mid-July 2014 in comparison with mid-July 2013

thanks to meager changes in both deposit and credit growth rates. The C/D

ratio of finance companies (89.7 percent) was highest than development

banks (80.9 percent) and commercial banks (74.9 percent).

-30

-20

-10

0

10

20

30

40

mid-

July, 2012

mid-

Jan, 2013

mid-

July, 2013

mid-

Jan, 2014

mid-

July, 2014

Figure 2.19: Trend of Credit Growth (in percent)

A' Class

B' Class

C' Class

Total BFIs

-15

-10

-5

0

5

10

15

20

25

30

35

mid-

July, 2012

mid-

Jan, 2013

mid-

July, 2013

mid-

Jan, 2014

mid-

July, 2014

Figure 2.20: Trend of Deposit Growth (in percent)

A' Class

B' Class

C' Class

Total BFIs


P a g e | 39

Profitability

2.40 The overall profitability of banking sector increased by 13 percent to

Rs. 29.33 billion in mid-July 2014 from 26.0 billion in mid-July 2013. The

commercial banks profitability constituted by 72.6 percent share to Rs. 21.3

billion of the total profitability of the banking sector in mid-July 2014 and

this profit has slightly increased by 1.1 percentage points from previous

year. Due to the higher spread between the interest charged on loan and

advance, and deposits, the banks‘ net interest income has increased in the

review period.

70

72

74

76

78

80

82

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

2011 2012 2013 2014

Figure 2.21: Credit Deposit (in million Rs.) and CD Ratio

(in percent) of BFIs

Credit deposit credit:Deposit ratio

6264666870727476788082

02468

101214161820

A B C A B C A B C

Jul-12 Jul-13 Jul-14

Figure 2.22: Classwise Profitability of BFIs (in percent)

Returns on Assets Returns on Equity Interest Margin to Gross Income (right scale)


40 | P a g e

2.41 The interest rate spreads have, on average, decreased slightly in by 0.5

percentage point in mid-July 2014 with respect to mid-July 2013 and

contributed to the decline in net interest margin. The interest margin to gross

income stood at 73.1 percent in mid-July 2014 which was 76.1 percentages

in mid-July 2013. The net profit of BFIs grew by 13.0 percent in mid-July

2014 from mid-July 2013. Consequently ROA increased to 1.5 percent by

0.1 percentage points but ROE slightly decreased to 14.4 percent in mid-

July 2014.

2.42 Interest income has the biggest share in total income of BFIs which

accounted for 79 percent in mid-July 2014 on which interest income on loan

and advance consists of 74 percent and 2 percent from investment on bonds

and debentures. Commission based income contributed only 5 percent of

total income which shows that banking sector has been concentrating in

traditional activities of lending and deposit mobilization only. The gain from

exchange fluctuation is 2.6 percent of total income of BFIs in mid-July

2014.


P a g e | 41

2.43 The ratio of non-interest expenses to total income decreased by 6.3

percentage points from 49 percent in mid-July 2012 to 42.7 percent in mid-

July 2014, attributable to proportionate increase in total operating income

compared with operating expenses. As the non-interest expenses to gross

income is still high, it reveals the fact that BFIs still bear high operating

expenses. This reflects the inefficiency of BFIs in their day to day operation.

Higher interest spread and higher non-interest expenses shows that the

banks are covering their high operating charge through the higher interest on

lending and lower interest on deposits.

Liquidity

2.44 Excessive liquidity has been the issue in financial sector since around two

years and more and it has been due to increasing remittance inflow in the

country and decrease in the credit growth against expectation. The volatile

political environment discouraged credit growth which also contributed to

increase liquidity in the system. NRB is measuring credit to deposit (C-D

ratio), liquid assets to total deposits and liquid assets to total assets as a

gross measure to calculate the liquidity condition prevailing in the financial

system.

2.45 Total liquid asset to deposit ratio of BFIs stood at 32.1 percent in mid-Jan

2014 compared to 32.8 percent in mid-July 2013. The liquid asset to deposit

ratios for "A", "B" and "C" class institutions were recorded at 31.2 percent,

35.7 percent and 36.7 percent respectively, in mid-Jan 2014. The ratios

were 32.5 percent, 34.6 percent and 33.2 percent respectively for "A", "B"


42 | P a g e

and "C" class in mid-July 2013. Hence, the ratios for all BFIs stood above

the regulatory requirement but it has been increasing the cost of fund for

BFIs and both the NRB‘s and BFIs liquidity management function seems

does not working in stabilizing the excess liquidity.

2.46 As at mid-July 2014, the credit to deposit ratio of BFIs stood at 76.5

percent. The credit to deposit ratios for "A", "B" and "C" class institutions

stood at 74.9 percent, 80.9 percent and 89.7 percent respectively. Such

ratios were 74.2 percent, 82.8 percent and 95.4 percent for "A", "B" and "C"

class "BFIs respectively in mid-July 2013. Despite the liquidity pressure

being moderated at present, liquidity risk is likely to hit banks at any time,

as they are operating under growing competition, poor asset/liability

management practices, poor corporate governance and high dependence on

corporate deposits. Likewise, large inflow of remittances as well as

excessive surplus of government resources with NRB since mid-July 2012

has been posing threat for liquidity management.

71.0

72.0

73.0

74.0

75.0

76.0

77.0

78.0

79.0

80.0

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

36.0

38.0

40.0

Mid-July 2012 Mid-Jan 2013 Mid-July 2013 Mid-Jan 2014 Mid-July 2014

Figure 2.25: Liquidity Indicator os BFIs (in percent)

Liquid Assets to total Assets Liquid Assets to total Deposits

Credit to Deposit Ratio (right scale)


P a g e | 43

Table 2.3 Financial Soundness Indicators of BFIs (in percent)

Indicators

Class "A" Class "B" Class "C" Overall

mid-

July

2013

mid-

July

2014

mid-

July

2013

mid-

July

2014

mid-

July

2013

mid-

July

2014

mid-

July

2013

mid-

July

2014

Credit and deposit related indicators

Total deposit/GDP 60.0 62.5 9.4 10.4 4.1 3.8 73.5 76.6

Total credit/GDP 44.5 46.8 7.8 8.4 3.9 3.4 56.2 58.6

Total credit/ Total

deposit 74.2 74.9 82.8 80.9 95.4 89.7 76.5 76.5

LCY credit/LCY

deposit and core

Capital

68.0 71.6 71.1 71.0 81.5 76.6 69.2 71.8

Fixed deposit/Total

deposit 33.8 30.3 28.2 27.0 47.7 46.8 33.9 30.7

Saving

deposit/Total

deposit

35.1 37.4 51.9 52.6 42.7 43.5 37.7 39.8

Current

deposit/Total

deposit

10.6 10.4 1.8 2.0 0.1 0.1 8.9 8.7

Assets quality related indicators

NPL/ Total loan 2.6 2.9 4.6 4.2 16.0 14.3 3.8 3.8

Total LLP/Total

loan 3.4 3.5 4.4 4.2 16.4 15.9 4.4 4.3

Res. Per. H. Loan

(Up to Rs. 10 mil.) 7.6 10.4 2.0 2.7 1.1 1.3 10.6 14.4

Real estate

exposure/Total loan 10.1 9.7 2.1 2.1 1.6 1.5 13.8 13.2

Deprived sector

loan/Total loan 4.7 5.2 4.3 5.4 3.1 3.5 4.5 5.1

Liquidity related indicators

Cash and bank

balance/Total

deposit

16.7 17.6 15.2 17.0 21.4 22.4 16.8 17.8

Investment in Gov.

security/Total

deposit

14.2 12.9 1.9 1.6 2.5 3.3 12.0 10.9

Liquid assets/Total

assets 26.1 25.9 26.2 27.9 21.6 23.9 25.8 26.1

Total liquid

assets/Total deposit 32.4 31.7 34.6 36.1 33.2 35.8 32.7 32.5

Source: Statistics, BFIRD, NRB


44 | P a g e

Capital adequacy related indicators

Core capital/RWA

( percent) 10.7 10.4 17.0 14.8 15.3 15.2 11.7 11.3

Total capital/RWA

( percent) 12.3 12.0 17.8 15.6 16.0 15.9 13.2 12.7

Wt. Avg. interest

rate on deposit 5.3 4.2

Wt. Avg. interest

rate on credit 12.1 10.5

Base Rate of BFIs

2.47 The base rate system is aimed for enhancing transparency in lending rate of

BFIs and strengthens monetary transmission mechanism. NRB has

introduced a base rate monitoring system of BFIs from 2013 to ―A‖ class

commercial banks and in 2014 to ―B‖ and ―C‖ FIs so as to promote

transparency in setting interest rate for different products to the clients and

ensure sustainability of BFIs as they are suggested not to lend below the

base rate. Since transparency in the pricing lending products has been key

objective, BFIs are required to publish their base rate on the monthly basis

on their website and quarterly basis on national dailies for general public

consumption. The introduction of base rate will promote transparency in

setting the interest rate for different products; the interest of clients will be

protected and healthy competition in the economy will be encouraged. The

BFIs will be able to set their floating interest rate easily as they will use the

cost of funds as a reference rate.


P a g e | 45

2.48. The base rate of all commercial banks has decreased in mid-July 2014 from

that of mid-July 2013. Standard Chartered Bank has minimum base rate of

5.3 percent while Agriculture Development Bank Limited has maximum

base rate of 11.32 percent in mid-July 2014. The maximum base rate in mid-

July 2013 was 12.8 percent of ADBL followed by 12.1 percent of Civil

Bank Ltd and minimum base rate was 6.3 percent of SCBNL. Among state

owned banks, NBL, RBB and ADBL has set base rate of 8.1 percent, 6.32

percent and 11.3 percent respectively in mid-July 2014. Their base rates

were 9.4 percent, 6.8 percent and 12.8 percent respectively in mid-July

2013. Hence, the base rate for the review period is in declining trend.

0 2 4 6 8 10 12 14

NBL

NABIL

SCBNL

NSBI

EBL

NCC

Lumbini

Kumari

SBL

Global IME

Prime

Grand

Kist

Mega

Civil

Sanima

Figure 2.26: Base Rates of Commercial Banks

Mid Jul-2014 Mid Jul-2013


46 | P a g e

Interest Rate Spread

2.49 After the financial liberalization in the country, number of banks and

financial institutions increased significantly, though the interest spread tends

to be the higher in the banking system. Interest rate spreads reflect the cost

of intermediation. The spread, at any given time, is generally function of

many factors, such as, expenses on deposits, the general level of

competition in the banking sector, the amount of credit risk, the managerial

efficiency of the lending process, and so forth. High spreads are usually

interpreted as an indicator of low efficiency and lack of competitiveness,

which adversely affects domestic real savings and investment, leading to

significant amelioration of growth. Due to high spread rate, NRB was forced

to regulate the spread. Highly risky investment sectors, near-to-two digit

inflation, high operating costs, heavy reliance on interest income for

survival, inefficiency of BFIs, diseconomies of scale due to small market

size, poor access to finance weakening the negotiating power of borrowers

etc. are seen as the major reasons for high interest rate spread in this

context.

2.50 With the objective to control randomness in fixing interest spread NRB

directed BFIs to bring their interest spread rate at 5.0 percent by mid-July

2014. BFIs are also directed to publish their spread in a month-wise basis.

Banks seem to be reluctant in decreasing their spread consistently. But, the

banks immediately need to act on decreasing the spread or otherwise urgent

decrease may have adverse effect on their balance sheets. As evident from

the figure 2.3, the overall interest spread of the commercial banks stood at

4.4 percent and the interest spread of the state owned banks remained 5.1

percent as of mid-July 2014. ADBNL has registered the highest interest rate

spread of 5.9 percent among commercial banks followed by Everest Bank

Ltd (5.8 percent). Civil bank has the lowest interest rate spread of 3.3

percent in the same period. Interest rate spread of state owned banks are

higher than that of private banks. Average interest rate spread of all banks is

4.4 percent in mid-July 2014 which is within the regulatory limit.


P a g e | 47

2.51 As evident from the figure 2.27 both deposit and lending rate remained more

or less stable in the review period from September 2013 to July 2014. Even

there is liquidity relaxation in the market which continued from 2011, the

lending rate did not fall as expected in the review period. The rate has been

declined only by 1.58 percentage point to 10.5 percent in mid-July 2014

from the 12.1 percent in mid-July 2013. Moreover, the optimum relaxed

liquidity position of the banking sector also encouraged banks to reduce the

deposit rate further by 1.1 percentage points to 4.2 percent in mid-July 2014

from 5.3 percent a year ago. Thus, we can see that the banks have though

decreased their interest rate on deposits due to excess liquidity in the system

but they still seems reluctant to decrease the interest rate on lending in the

same proportion, as a result the interest rate spread is still high. But if we

observe the interest rate spread over the review period, on an average, it has

decreased slightly in mid-July 2014 with respect to mid-July 2013. Base

rate of commercial banks over the review period has decreased to 8.4

percent in mid-July 2014 from 9.9 percent in mid-July 2013.

Banking Sector Consolidation: Mergers & Acquisitions

2.52 The banking sector needs to consolidate to improve its financial stability, its

intermediation function, and access to finance. Consolidation is essential for

0%

1%

2%

3%

4%

5%

6%

San

ima

Cen

tury

Civ

ilM

ega

Janat

aL

um

bin

iG

rand

NC

CN

MB

NB

BL

Kis

tG

lob

al I

ME

Cit

izen

sP

rim

eS

unri

seM

BL

Kum

ari

SB

LL

axm

iN

IC A

SIA

BO

KE

BL

NS

BI

HB

LS

CB

NL

Nab

ilN

IBL

AD

BN

LR

BB

NB

LA

ll B

anks

SO

Bs

Figure 2.27: Net interest Spread of Commercial banks (in

percent points)


48 | P a g e

building sufficient resilience in the BFIs. Financial Consolidation can be in

the form of mergers and acquisitions. Increasing capital and asset bases

through consolidation would enable BFIs to mobilize lower cost, long term

funds and build greater resilience to shocks. The synergies that could be

achieved through consolidation would help make available a wider array of

products to customers. Diversifying the products offered and in turn, the

customer base would help diversify risks, thereby helping them to become

more resilient. Having a smaller number of larger and stronger firms would

create an industry that is fully compliant with the Central Bank‘s

supervisory and regulatory norms.

2.53 NRB has taken consolidation in the financial sector as an important reform

measure for building strong and competitive financial institutions. In Nepal,

financial sector consolidation is facilitated by the merger & acquisition. To

strengthen the health and competency of BFIs, NRB has given high priority

to merger between licensed financial institutions. It includes specific

process of merger with several incentives, regulatory relaxations and

indirect provision of forceful merger. NRB, through consolidation among

BFIs, has expected to yield the benefits of becoming larger institutions,

enhancing their capacity for providing modern financial products, enhance

6

6.2

6.4

6.6

6.8

7

7.2

0

2

4

6

8

10

12

14

Jul, 013Aug, 013Sep, 013Oct, 013Nov, 013Dec, 013Jan, 014Feb, 014Mar, 014Apr, 014May, 014Jun, 014July, 014

Figure 2.28: Deposit, Lending, Spread & Base Rates (in

percent)

Deposit Rate Base rate


P a g e | 49

strong corporate governance culture, strengthen capital base and ability to

introduce new products and use enhanced IT platforms, provides economies

of scope, lower the cost of funds and builds resilience to domestic and

external shocks.

Merger and Acquisition

2.54 NRB issued "Bank and Financial Institutions Merger By-law 2011" and

Acquisition Bylaw, 2013 as the means of financial sector consolidation.

After the issuance of merger bylaw, the merger activities of BFIs got further

accelerated. As on mid-July 2014, 9 commercial banks, 25 development

banks and 27 finance companies were merged to become 5 commercial

banks, 16 development banks and 25 finance companies, which altogether

61 BFIs have merged with each other, leading to the creation of 25 BFIs. In

addition to this, fiver regional rural development banks were merged with

each other to become one national level rural development bank during mid-

August 2014. By the mid-July 2014, four commercial banks were merged

with each other to become two large commercial banks. To consolidate the

financial system, along with the merger process among the BFIs, acquisition

activities have been encouraged as per the provision of Acquisition Bylaws.

Meanwhile, due attention is also given to avoid possible contraction in

access to finance and concentration of business risks as a result of the

merger process.

Financial Access and Inclusion

2.55 Financial inclusion is emerging as the new paradigm of economic growth.

Financial services are increasingly being seen as important to poverty

reduction and achievement of development goals. Thus, access to financial

services can promote social inclusion and build self-confidence and

empowerment, in particular among women. It is estimated that more than

2.7 billion people in developing countries – the majority of adults – are still

excluded from the financial services market.

2.56 Financial inclusion in the country helps to promote sustainable development

and generating employment in rural areas for rural population. With the

growth rate of only 3.5 percent annually having 23 percent population


50 | P a g e

below poverty line, the Gini coefficient of 32.8 and HDI of -0.540, the

country has been focusing in inclusive growth to reduce mass poverty and

income disparities. NRB and the Government of Nepal have taken various

steps to increase banking penetration in the country.

Financial Inclusion and Efforts of NRB

2.57 NRB has put forward the overarching goal to increase access to financial

services in the country. In order to achieve this goal NRB has pursued

various policies and programs: (I) polices and regulatory environment that

allows BFIs to offer financial services to the remote areas where there is

lack of financial access, (ii) develop financial infrastructure that have

capacity to provide high quality financial services (iii) innovative models of

financial service provision that are used effectively to extend outreach to

underserved regions and groups and (iv) increased capacity of clients to

understand and utilize financial services effectively.

2.58 To hasten financial inclusion, NRB has undertaken several measures. NRB

made provision under which BFIs have to open at least one branch in

remote districts having low financial access. Similarly, BFIs are subject to

get interest free loan for opening their branches in such districts where there

is lack of financial access. NRB also introduced branchless banking, mobile

banking and other types of electronic banking services which help to

enhance financial access in the country. NRB also issued directives on

lending on productive sector and deprived sector lending in order to enhance

financial inclusion for inclusive growth. Except these, NRB has been also

taking initiations on financial literacy programs and financial consumer

protection which is expected to enhance the banking habits of unbanked

people.

2.59 During past decade, the banking industry has shown tremendous growth in

volume and complexity. Despite making significant improvements in all the

area relating to financial viability, profitability and competitiveness, there

are concerns that banks have not been able to include vast segment of the

population, especially the under privileged sections of the society, into the

fold of basic banking services.


P a g e | 51

Table 2.4 Branches of BFIs

Financial

Institutions

Number of Branches Share(in percent)

Mid-July

2013

Mid-July

2014

Mid-July

2013

Mid-July

2014

Commercial Banks 1486 1547 59.63 59.41

1. SOBs 506 563 20.30 21.62

2. Private Banks 980 984 39.33 37.79

Development Banks 764 818 30.66 31.41

Finance Companies 242 239 9.71 9.18

Total 2492 2604

2.60 Financial access has been increasing with the expansion of network of

financial institutions. As of mid-July 2014, the branch network of

commercial banks reached 1547, followed by 818 branches of development

banks and 239 branches of finance companies. Similarly, according to

regional distribution, the majority branches of BFIs are situated in the

central development region totaling of 1222 (46.9 percent), followed by

western development region 620 (23.8 percent) and eastern development

region 422 (16.2 percent). As a result, in mid-July 2014, on an average, a

BFI branch has been serving approximately 10,174 people, excluding the

branches of ―D‖ class financial institutions.

Table 2.5: Regional Allocation of BFI Branches

Region

BFIs

Total Share (in

percent)

Population

(in millions)

Population

(per branch) A B C

Eastern 287 109 26 422 16.3 5.81 13772

Central 770 316 136 1222 46.9 9.66 7903

Western 264 290 66 620 23.8 4.93 7947

Mid-

western 136 75 9 220 8.4 3.55 16122

Far-western 90 28 2 120 4.6 2.55 21271

Total 1547 818 239 2604 100.00 26.49 10175


52 | P a g e

2.61 Increase in number of branches of BFIs is considered as one of the

indicators of financial inclusion. Banking industry occupies a bigger chunk

in the financial system; however, a larger chunk of banking services is still

concentrated in urban areas. More especially, the banking services still seem

to be concentrated in urban cites. Despite of continuous efforts from the

NRB for financial access and inclusion, there is very little number of

branches of BFIs occupied in specified least branched districts. This level of

reach and penetration also means that the financial inclusion is yet to

strengthen to follow economic progress in the country. Kathmandu is

highly concentrated districts in terms of number of BFIs presence, followed

by Rupendehi and Kaski. Similarly, Mugu, Kalikot, Dopla, Bajhang and

Bajura have only two branches in each district (fig 2.29).

Table 2.6: Presence of BFIs in Least Banked Areas

BFIs

14 Districts with least

Branches Total Branches

Branches Share

(percent) Total

Share

( in percent)

Commercial

Banks 45 90 1547 59.4

Development

Banks 5 10 818 31.4

Finance

Companies 0 0 239 9.2

Total 50 100 2604 100

529

159

149

136

108

100

88

82

66

60

0 200 400 600

Kathmandu

Rupandehi

Kaski

Chitawan

Lalitpur

Morang

Jhapa

Sunsari

Banke

Parsa

2

2

2

2

2

3

3

3

4

4

0 1 2 3 4 5

Mugu

Kalikot

Dolpa

Bajhang

Bajura

Manang

Humla

Darchula

Okhaldhunga

Jajarkot

Figure 2.29: Ten Districts with Lowest and Highest Numbers of Bank

Branches


P a g e | 53

2.62 Investments in information technology (IT) based systems to improve

banking efficiency and service delivery is vital in this competitive age. The

resulting greater efficiency and outreach will help promote financial

inclusion, reduce intermediation costs and thereby improve the bottom line.

The growth observed in total numbers of ATM terminals, number of debit

cards, credit cards issue shows that banking is getting more automated.

Table 2.7: Use of Financial Services

Services Class "A" Class "B" Class "C"

No. of ATM, Outlet 1362 260 30

No. of Debit Cards 3641960 465640 23642

No. of Credit Cards 57898 0 0

No. of Deposits Accounts 9791383 2773198 564993

2.63 Branchless banking has been developed to address the payment needs of

people who do not have access to the financial system. Branchless banking

is cheaper means of banking system which can be operated in the remote

districts whilst mobile phone based payment systems have been introduced

to enhance convenience in making payments at merchandise outlets using

technologies and other banking transactions.

Table 2.8: Status of Branchless and Mobile Banking

BFIs

Branchless Banking Mobile Banking

No. of

Clients

No. of

transact-

ions

Transactions

(Rs. in

millions)

No. of

Clients

No. of

transact-

ions

Transact-

ions (Rs. in

millions)

Class A 151066 110116 825 768424 2521007 18201767

Class B 0 0 0 63 54 2044

Class C 0 0 0 13 8 1

Total 151066 110116 825 768500 2521069 18203812


54 | P a g e

Performance and Reform of State Owned Banks

2.64 Nepal Bank Limited (NBL),

Rastriya Banijya Bank (RBB)

and Agriculture Development

Bank Limited (ADBL) are the

three state owned commercial

banks, which occupied 16.18

percent share in GDP in terms of

total assets & liabilities among

the BFIs (―A‖, ―B‖ and ―C‖

class). The share of BFIs with

the GDP in terms of total assets

& liabilities reached to 104.9 percent in mid-July 2014. The total assets of

state owned banks (SOBs) reached to Rs. 312 billion in mid-July 2014 from

Rs.264 billion in mid-July 2013. The total share of SOBs on total assets of

commercial banks is 21.3 percent in mid-July 2014.

2.65 The state owned commercial banks have 26.99 percent share in total deposit

accounts and 43.3 percent in total borrowers of banking system. Their

market share in terms of total assets stood at 16.9 percent, whereas in total

deposit and loan & advances reached to 16.4 and 14.7 percent respectively

in mid-July 2014. Hence, the market share as well as the share with assets &

liabilities to GDP in aggregate balance sheet of financial sector explains

about the impact that state owned banks have on financial stability of

Nepalese financial system. Among these banks, financial and regulatory

position of ADBL, especially in terms of capital base and capital adequacy

seems to be satisfactory. NBL and RBB have been facing quite difficult

situation since a decade, the financial soundness indicators importantly the

assets quality have been gradually improving in the period however. Reform

of RBB and NBL was one of the objectives of Financial Sector Reform

Program (FSRP) in the past and it has made significant improvements.

2.66 As of mid-July 2014, capital fund of all three state owned banks are positive

at Rs. 4.1 billion, Rs. 3.5 billion and Rs. 18.5 billion respectively for NBL,

RBB and ADBL. The figure was negative by Rs.346 million, 2.0 billion and

18.1 billion respectively for NBL, RBB and ADBL in mid-July 2013.

21.30

%

78.70

%

Figure 2.30: Share of SOBs in

Total Assets

SOBs Other Banks


P a g e | 55

2.67 The tier 1 and tier 2 capital of ADBNL is well above the regulatory

requirement. The tier one capital of ADBNL stood at 12.8 percent and 15.2

percent in mid-July 2014. Such capital, decreased in mid-July 2014 as

compared to mid-July 2013 when both ratios were 18.3 percent and 15.2

percent respectively. Likewise, reform of two SOBs lead the improvement

in tier 1 and tier 2 capitals. Tier 2 capital of NBL and RBB was 5.3 and 5.6

percent respectively in mid-July 2014 compared to -5.5 and -9.4 percent

respectively in mid-July 2013. The NPL ratio of state owned banks is

improving from 5.9 percent in mid-July 2013 to 4.94 percent in mid-July

2014. As on mid- July 2014 the NPL ratio of ADBNL, RBB and NBL was

5.3 percent, 4.0 percent and 5.8 percent. The NPL ratio of ADBNL & NBL

was slightly higher than the regulatory limit. If NPL ratio of SOBs could be

brought within the regulatory limit of 5.0 percent, NPL ratio of banking

industry can further be decreased from current ratio of 2.9 percent. Along

with improvement in NPL ratio, LLP to total loan ratio of all of three SOBs

have been improving - recording a reduction from 8.65 percent in mid-July

2013 to 6.47 percent in mid-July 2014. The decline is particularly due to

reduction in NPL.

0

20000

40000

60000

80000

100000

120000

-10000

-5000

0

5000

10000

15000

20000

25000

30000N

BL

RB

B

AD

BN

L

NB

L

RB

B

AD

BN

L

NB

L

RB

B

AD

BN

L

July, 2012 July, 2013 July, 2014

Figure 2.31: Paid-up Capital, Capital Fund & Deposits

(Right Scale) of SOB (in million Rs.)

Capital fund Paid-up CapitalDeposits


56 | P a g e

2.68 State owned banks have a large branch network coverage in financial

system that cover 33.9 percent of total commercial bank branches as of mid-

July 2014. Their branches increased from 506 in mid-July 2013 to 511 in

mid-July 2014. State owned banks have 80 ATMs which indicates a slower

and poorer response towards automation of banking system.

2.69 State owned banks are the major investors in deprived sector lending among

BFIs. Though aggregate deprived sector lending of commercial banks is 5.2

-15%

-10%

-5%

0%

5%

10%

15%

20%

NBL RBB ADBNL NBL RBB ADBNL NBL RBB ADBNL

July, 2012 July, 2013 July, 2014

Figure 2.32: Tier 1 and Tier 2 Capital of SOBs

Tier 1 & Tier 2 Capital /RWE Tier 1 Capital/RWE

0.00%2.00%4.00%6.00%8.00%

10.00%12.00%14.00%

AD

BN

L

RB

B

NB

L

Oth

er B

anks

AD

BN

L

RB

B

NB

L

Oth

er B

anks

AD

BN

L

RB

B

NB

L

Oth

er B

anks

July, 2012 July, 2013 July, 2014

Figure 2.33: NPL and LLP Ratios of SOBs

LLP/TL NPL/TL


P a g e | 57

percent of the total loan, state owned banks have invested 25.2 percent of

their total loan in mid-July 2014. The deprive sector lending of RBB is 7.3

percent and ADBNL 16.8 percent in mid-July 2014 which is well above the

regulatory requirements of NRB, whereas such lending of NBL is only 1.2

percent only (below the requirements of NRB).

2.70 Thus, state owned banks hold a major portion of share in total banking

sector. The ups and downs in performance of these banks can alter the

financial soundness indicators of the whole banking system. Therefore,

timely reform of these BFIs is must for improving the performance

indicators of financial sector and maintaining the financial stability.

Likewise, the quality of manpower which is a key for the success of these

banks, require to re-structure and continue to recruit new manpower from

the market and replace the old manpower with energetic new talents.

58 | P a g e


Deposit Taking Institutions

P a g e | 59

CHAPTER - THREE

4 DEPOSIT TAKING INSTITUTIONS

Performance of Commercial Banks

3.1 In the Nepalese financial system, BFIs have the prominent share of assets

and among which commercial banks have the highest share in total assets.

As in mid-July 2014, share of total assets and liabilities of commercial

banks is 78.1 percent which increased by 0.3 percentage point from mid-

July 2013. Similarly, share of total assets and liabilities of commercial

banks on total GDP reached to 76.1 percent from 73.4 in mid-July 2013.

The dominance of commercial banks in total banking sector in terms of

assets and liabilities as well as in terms of balance sheet component has

been broadly remained stable. The total assets and liabilities of commercial

banks increased by 18.0 percent to Rs. 1467.2 billion in mid-July 2014 from

Rs. 1242.9 billion in mid-July 2013.

3.2 Total deposit and credit of commercial banks stand at 62.5 and 46.8 percent

of GDP in mid-July 2014. Total deposits grew by 18 percent to Rs. 1204.5

billion during the period of mid-July 2013 to mid-July 2014, surpassing

previous growth of 17.6 percent during mid-July 2012 and mid-July 2013.

Total credit flows grew by 19.1 percent to Rs.902.2 during the mid-July

2013 to mid-July 2014.

3.3 After loan and advances, investment in government securities has emerged

as a second best option for the commercial banks to utilize the excess

liquidity. Investment in government securities increased by 7.1 percent to

Rs. 155.2 billion in mid-July 2014 from Rs. 144.9 billion in mid-July 2013.

In the context where major balance sheet indicators such as capital, deposits,

lending, investments, liquid funds etc. are showing positive growth,

borrowing decreased by a noticeable rate of 33.2 percent to Rs. 15.2 billion

in mid-July 2014 in comparison to that in mid-July 2013. Such decrease is

due to excess liquidity prevailing in the financial system. Borrowing by

means of bonds and securities increased by 17.6 percent as issuance of

debentures and bonds is in trend.

3.4 The capital fund of commercial banks rose by 14.3 percent to Rs. 108.2

billion in mid-July 2014 from Rs. 94.7 billion in mid-July 2013. Of which,


60 | P a g e

paid up capital rose by 9.8 percent, whereas statutory reserves and other

reserves rose by 25.9 percent and 28.9 percent respectively, during mid-July

2013 and mid-July 2014. However, retained earnings remained negative on

mid-July 2014.

3.5 The aggregate NPL to total loan ratio of commercial banks rose to 2.9

percent in mid-July 2014 in comparison to the ratio of 1.9 percent in mid-

July 2013. The three states owned banks in total have NPL ratio of 4.9

percent where as that of private commercial banks is only 2.5 percent in

mid-July 2014. As in mid-July 2013, average NPL ratio of three state owned

commercial banks was 5.3 percent, whereas such ratio for private

commercial banks was 1.9 percent. Hence, credit quality of commercial

banks has slightly deteriorated. However, NPL ratio is below regulatory

limit of 5.0 percent, which does not warrant financial stability risk while

measuring in terms of assets quality.

Table 3.1: Major Financial Indicators of Commercial Banks

Indicators Commercial

Banks (percent)

Private-Sector

Banks (percent)

State-owned

Banks

(percent)

Tier 1 & Tier 2

Capital /RWE 12.03 12.63 9.93

Tier 1 Capital/RWE 10.39 10.98 8.30

NPL/Total Loan 2.92 2.47 4.94

Return on Equity 24.47 26.93 18.21

Net Interest Spread 4.38 4.19 5.14

Total Credit to Total

Deposit 74.90 76.68 67.85

Liquid Assets/Total

Deposit 31.78 29.20 42.02

Base Rate 8.37 8.34 8.57

3.6 Despite the directive of NRB to BFIs to invest at least 12.0 percent of total

loan in agricultural and electricity sector, only 4.5 percent of total loans of

commercial banks had been disbursed in agricultural sector and 2.4 percent

in electricity, gas and water sector. Manufacturing (Producing) related

sector availed 23.0 percent of total loan and retailer and wholesaler sector

utilized 22.8 percent of total loan. Likewise, out of total loan 8.07 percent


P a g e | 61

and 7.6 percent was forwarded to real estate sector and consumption sector

respectively.

3.7 While comparing with the product-wise loan with the previous year,

commercial banks found discouraged to invest in real estate lending as such

lending has declined to 13.8 percent in mid-July 2014. Investment in

business purpose loans such as term loan, overdraft loan, demand and other

working capital loan increased by a significant percentage of 27.1 percent,

13.7 percent and 16.5 percent respectively. There was remarkable growth in

residential and hire purchase loan which shows that banking sector;

especially the CBs have still higher attraction in such loans (retail lending)

for the short term profitability and performance. Similarly, commercial

banks have forwarded 5.2 percent of total loan in deprived sector in the

review period. Collateral-wise, loan against real estate as collateral has been

in the increasing trend. Out of total loan, 81.3 percent of total loan has been

disbursed against the collateral backup of fixed and current real assets.

3.8 Net Profit of the commercial banks increased to Rs.21.3 billion in mid-July

2014 compared to Rs. 21.1 billion in the same period of previous year. Out

of total 30 commercial banks, only two faced net loss in the review period.

However, other measurements of profitability such as ROA and ROE

dipped from the figures of same period of previous year as profitability did

not increase proportionally with the increment in assets and equity. Total

assets rose by 18.04 percent, whereas net profit saw a meager growth of 1.1

percent during mid-July 2013 and mid-July 2014. Contribution of interest

income was in tandem with previous years with 82 percent of total income

coming from interest payments on lending.

Stress Testing of Commercial Banks

Credit Shock

3.29 Stress test results show that there is growing risk in credit among

commercial banks. Stress testing results based on data of mid-July 2014

obtained from 30 commercial bank revealed that a combined credit shock of

15 percent of performing loans deteriorated to substandard, 15 percent of

substandard loans deteriorated to doubtful loans, 25 percent of doubtful

loans deteriorated to loss loans and 5 percent of performing loans

deteriorated to loss loans would push the capital adequacy ratio of 29


62 | P a g e

commercial banks below the minimum regulatory requirement of 10.0

percent. The numbers of such banks were 28 in mid-Jan 2014 and 27 in

mid-July 2013.

3.30 Stress testing results under the scenario of all non-performing loans under

substandard category downgraded to doubtful and all non-performing loans

under doubtful category downgraded to loss underscores a pessimistic

scenario as the number of banks capable of withstanding such shock without

deteriorating capital adequacy to below 10 percent grew to four, up from

previous reading of three in mid-January 2014. Similarly, stress testing

results under the scenario of 25.0 percent of performing loans of real estate

and housing sector directly downgraded to substandard showed same result:

deteriorating capital adequacy of four banks to below minimum requirement

of 10 percent. However, another scenario of 25.0 percent of performing

loans of real estate and housing sector directly downgraded to loss loans

showed some respite as it was stable since mid-January 2014 stability.

Under this scenario, capital adequacy ratio of 9 commercial banks will come

below the required level of 10 percent, representing no changes since mid-

Jan 2014. The result showed that majority of commercial banks maintained

their resilience towards realty sector during last six months.

3.31 In an another credit shock test, under the scenario of top two large exposures

(loans) were downgraded from performing to substandard category, the

capital adequacy ratio of six commercial banks would fall below the

required level whereas the number of such commercial banks was three in

mid-January 2014. Increase in number of such banks shows they are

weakening their position by increasing dependency on such exposures.

3.32 The overall credit shock scenario revealed that banks‘ credit quality has been

deteriorating on contrary to the expectation despite the various measures

taken during the review period. Furthermore, banks are likely to face a

difficult situation in case of slowdown in recovery, downgrade of loans to

loss category of NPLs and increase in provisioning.

Liquidity Shock

3.33 Results from stress tests under liquidity shock show encouraging

improvements in liquidity resilience among commercial banks. The stress

test under scenario of withdrawal of customer deposits by 2, 5, 10, 10 and


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10 percent for five consecutive days results showed a third of 30

commercial banks are vulnerable towards liquidity crisis; a remarkable

improvement over 16 in mid-Jan 2014 reading.

3.34 None of the banks were prone to liquidity shock of withdrawal of 5 percent

of deposits in a single day, while seven banks' liquidity ratio would drop

below 20 percent after withdrawal of 10 percent deposit in a single day. The

number of banks seeing their liquidity ratio drop below 20 percent would

grew to 17 if the single day deposit withdrawal increased to 15 percent. The

numbers of banks prone to liquidity shock under single day deposit

withdrawal of 5, 10 or 15 percent were 2, 12 and 15 respectively on mid-

January 2014.

3.35 With the shock of withdrawal of deposits by top 2, 3 or 5 institutional

depositors, liquid assets to deposit ratio of 8, 11 and 18 commercial banks

would be below 20.0 percent in mid-July 2014. The numbers were 11, 15

and 20 in mid-January 2014. However, there was no vulnerability among all

commercial banks in case of deposit withdrawals from top 2, 3 or 5

individual depositors. These findings of liquidity shock show that liquidity

position of commercial banks has significantly improved over the period

from mid-January 2014.

Market and Combined Credit and Market Shock

3.36 The stress testing result under market shock revealed that 26 commercial

banks have maintained enough CAR to absorb the interest rate shock and

maintain it above the regulatory requirement. The interest rates were

calibrated by changes in deposit and credit interest rates from 0.5 to 2.0

percent.

3.37 Similarly, commercial banks found to be safe from exchange rate risks as

the net open position to foreign currency was lower for a majority of them.

Furthermore, since commercial banks have nominal equity investments, the

impact of fluctuation in equity price is near to Zero.

3.38 When going through market shock, 29 out of 30 commercial banks

(excluding two state owned banks) could maintain their capital adequacy

ratio above the regulatory requirement of 10.0 percent.


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3.39 The banks did not bear interest rate risks as they pass it directly to their

clients; so, they are found to be less affected by interest rate shock as well.

3.40 The combined credit and market shocks based on a scenario of 25.0 percent

of performing loan of real estate and housing sector directly downgraded to

substandard category of NPLs and fall of the equity prices by 50.0 percent

showed that CAR of four banks would fall below 10 percent. However,

under a more adverse scenario of 15.0 percent of performing loans

deteriorated to substandard, 15.0 percent of substandard loans deteriorated

to doubtful loans, 25.0 percent of doubtful loans deteriorated to loss loans

and the equity prices fall by 50.0 percent, the CAR of just 3 banks would

remain above the regulatory minimum level.

3.41 The resilience of commercial banking system of Nepal towards key stress

testing scenario analysis showed a sound and strong financial system

through all three kinds of credit, liquidity and market shocks. However, the

test showed high chances of vulnerability in public sector banks and

moderate chances in private sector banks.

Performance of Development Banks

3.42 Total assets and liabilities of development banks rose by 23 percent to Rs.

256.05 billion in mid-July 2014 compared to the figure of mid-July 2013.

Likewise, the capital fund of development banks increased to Rs. 32.0

billion in mid-July 2014 compared to Rs. 27.5 billion in mid-July 2013. The

capital adequacy ratio stood 15.8 percent in mid-July 2014 which was

decreased by 0.2 percentage point from the level of 16.8 percent in mid-July

2013. The reason behind such fall in CAR was the increase in risky assets.

Paid-up capital of development banks increased by 9 percent in mid-July

2014 to 25.6 billion from mid-July 2013.

3.43 During the period of a year to mid-July 2014, deposits in development

banks grew by 24.8 percent to 199.9 billion, whereas lending grew at a

slower pace by 23 percent to 161.8 billion. The ratio of credit to domestic

deposit stood at 81.2 in mid-July 2014, recording a improvement over 83.0

percent in mid-July 2014 while credit to deposits and core capital ratio stood

at 70.4, well below regulatory requirement of 80. The ratio of credit to

domestic deposit and core capital was 71.3 in mid-July 2013.


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3.44 Loan loss provisioning increased by 21.3 percent to Rs. 6.9 billion within

the period of a year to mid-July 2014. Increase in non-performing loans has

resulted in high growth of provisioning while total non-performing loan was

at 6.74 billion, up 11.8 percent from a year to mid-July 2014. In percentage

terms, the ratio of NPL to total gross loan was at 4.2 percent in mid-July

2014 compared to 4.5 percent in mid-July 2013.

3.45 In terms of income, development bank have registered a growth of 1.74 in

interest incomes while net operating income grew by 21.5 percent during

the period from mid-July 2013 to mid-July 2014. Similarly, net profit of

development banks leapfrogged by 121.7 percent to record an

unprecedented level of Rs.3.6 billion. The record profit was mainly due to

write back of previous loan losses. The ROE and ROA of development

banks stood at 14.0 and 1.4 percent respectively.

Table 3.2: CAELS Rating of Development Banks

Particulars Ratios (in percent)

Capital Adequacy Ratio 15.8

Credit to Deposit (LCY) and Core Capital 70.4

Non-Performing Loan to Total Loan 4.2

Net Liquid Asset /Total Deposit 34.9

Return on Assets (ROA) 1.4

Return on Equity (ROE) 14.0

Stress testing of Development Banks

3.46 NRB has issued directives on stress testing on Jan 2014 stating that all the

national-level development banks are required to conduct stress tests and to

report it to NRB on a quarterly basis. Among 19 national-level

development banks as of mid-July 2014, one bank has been declared

problematic and it is under the management control of NRB out of total

development banks. 18 national-level development banks stress test result

found that development banks remained less vulnerable to credit shocks and

liquidity shocks in aggregate. However, some banks were seemed to be

more vulnerable to combined effect of both credit and liquidity shocks.

Position of banks after stress testing scenarios is shown in the following

table.


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Table 3.3: Stress Test Results of Development Banks

Criteria Number

No. of banks with CAR below 10 percent before shocks 1

A. Credit Shock

No. of BFIs

having CAR<10

percent

15 Percent of Performing loans deteriorated to substandard 3

15 Percent of Substandard loans deteriorated to doubtful

loans 1

25 Percent of Doubtful loans deteriorated to loss loans 1

5 Percent of Performing loans deteriorated to loss loans 5

All NPLs under substandard category downgraded to

doubtful. 1

All NPLs under doubtful category downgraded to loss. 1

25 Percent of performing loan of Real Estate & Hosing

sector loan directly downgraded to Loss category of NPLs. 2

25 Percent of performing loan of Real Estate & Hosing

sector loan directly downgraded to Loss category of NPLs. 1

Top 5 Large exposures downgraded: Performing to

Substandard 2

B. Liquidity Shock

No. of BFIs

having Liquidity

Ratio<20 percent

Withdrawal of deposits by 5 percent 1




Withdrawal of deposits by top 1 institutional depositor. 0

Withdrawal of deposits by top 2 institutional depositors. 1




Number of BFIs illiquid after on 5th day while withdrawal

of deposits by 10 percent 4


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Performance of Finance companies

3.47 Finance companies hold 3.8 percent of GDP in terms of total assets and

liabilities in mid-Jul 2014 whereas such share was 4 percent of GDP in mid-

July 2013. The total assets and liabilities of finance companies increased in

mid-July 2014 by 3.9 percent to 110.3 billion compared to mid-July 2013.

Deposit of finance companies occupies 3.8 percent of share in total GDP.

Finance companies mobilized aggregate deposit of Rs. 73.4 billion in mid-

July 2014 which is a growth of 6.5 percent compared to mid-July 2013.

3.48 Loan and advances of finance companies of Rs. 65.8 billion accounted for

3.4 percent of total GDP. It grew marginally in mid-July 2014 from mid-

July 2013. Of total loan and advances, private sector accounted for more

than 97 percent, followed by financial institutions, with 3.0 percent. The

investment of finance companies was Rs. 2.4 billion in mid-July 2014 which

was Rs. 1.8 billion in mid-July 2013. Of such investment, investment in

government securities accounted for 98.0 percent.

3.49 Capital fund of finance companies was 10.0 billion in mid-July 2014 which

is 15.9 percent of risk weighted exposure of the same period. In mid-July

2013 such ratio was stood 16.04 percent with Rs.12.0 billion. Decrease in

capital fund in the review period can be attributed to decrease in the

numbers of finance companies and sharp decrease in retained earnings in

same period.

3.50 The credit to deposit ratio of finance companies was 76.5 percent in mid

July 2014 below prescribed limit of 80 percent. Such ratio was 81.5 percent

in mid July 2013. Total non-performing loan of finance companies was very

high with 14.3 percent of total loan and advances in mid July 2014 which

was 16.8 percent in mid July 2013. Non-banking assets of finance company

have increased by 55.4 percent to 1.2 billion in mid July 2014 from 752

million in mid-July 2013. Loan loss provisioning reached to Rs. 10.5 billion

in mid-Jan 2014 from Rs. 10.8 billion in mid-July 2013.

3.51 Finance companies, as a whole, are in profit as exemplified by positive

ROA (2.23 percent) and ROE (2.23 percent), despite some of them being

declared problematic and few others are under prompt corrective actions.


68 | P a g e

3.52 Total liquid assets to total deposit stood at 35.8 percent in review period

which shows finance companies are in comfortable position in terms of

liquidity. Out of total loan and advances share of loan to agriculture is

minimal with 2.9 percent while construction and wholesale and retail

received 15.5 and 13.6 percent respectively. While 28.7 percent of loan is

provided to other sectors which points to the use of credit in non-productive

sectors.

3.53 Demand and working capital loan and term loan has 22.4 and 13.2 percent

share in total loan portfolio. Deprived sector loan has 3.1 percent share

which is lower than prescribed limit of 3.5 percent in aggregate. That shows

finance companies failed to comply with the regulatory limit on deprived

sector lending. Real estate sector received 14.0 percent loan portfolio. In

mid-July 2013 real estate loan has 15.4 percent share in total loan and

advances. Since, most of the loans of finance companies are based on

collateral and some loans are disbursed without analyzing real purpose, such

loan could shoot up much higher than reported figures.

3.54 Number of finance companies has decreased to 54 in mid-July 2014 from 59

in mid-July 2013. During the review period, one more finance company has

been declared problematic, which totaled 8 finance companies being labeled

as problematic, whereas another one is under prompt corrective action.

There are different types of financial institutions which are competing for

the same market segment, thus creating pressure on the smaller institutions

with higher cost of fund. Due to low interest rates in other financial

institutions, especially in commercial banks, most of the good loans have

started to shift to those banks. Similarly, Involvement of non-banking

intuitions, like credit cooperatives in same type of deposit and credit

transactions has further added to the pressure on finance companies. In such

adverse market conditions most of the finance companies are squeezed

between the option of lowering the cost of fund or merge with financial

institutions with strong capital base. However, such a scenario has created a

favorable environment for merger and acquisition.


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Performance of Microfinance Financial Institutions

3.55 As of mid-July 2014, 37 micro finance financial institutions (also known as

micro finance development banks) are providing services to poor and the

deprived community of the country. They consisted of 5 Grameen Bikas

Banks (now as Nepal Grameen Bikas Bank Limited after merger), 29

private sector micro finance development banks replicating the 'Grameen

Banking Model' and 3 wholesale lending micro finance financial institutions

(MFFIs). The number of branches of MFFIs reached 851. Due to open

licensing policy on MFFIs, these numbers are growing steadily. Nepal

Rastra Bank has not put moratorium on licensing of those institutions with

the aim of financial expansion and inclusion.

3.56 Total members of MFFIs increased by 29.0 percent to 16,16,367 in mid-July

2014. Out of total members, GBBs have 1,91,781 members. The total loan

disbursed by the MFFIs as of mid-July 2014 rose by 37.9 percent to Rs.

194.4 billion as compared to previous year. Out of the total loan, the five

GBBs disbursed Rs. 41.2 billion during the period.

3.57 GBBs banks collectively hold assets/liabilities worth Rs.49. 09 billion, an

increment of 37.3 percent in a year to mid-July 2014. GBBs‘ share of assets

stood at 13.0 percent. Out of the total assets, loan and advances registered a

growth rate of 51.4 percent to Rs. 35.4 billion. GBBs' share in this category

stood at 10.9 percent. The ratio of loan and advances to the total assets stood

at 72.5 percent. Out of the total loans and advances, wholesale loan

provided by 4 institutions shared 27.0 percent, while individual loans shared

remaining part. MFFIs have not booked any asset as non-banking assets

during the review period. Likewise, investment of those banks during the

review period reduced by 2.2 percent to Rs.3.0 billion. In this category, the

share of GBBs stood at 8.2 percent. Out of total investment, the ratio of

investment in government and NRB securities stood at 3.9 percent.

3.58 Total saving deposit mobilization of MFFIs increased by 52.9 percent to Rs.

11.0 billion in mid-July 2014. Out of the total deposit, the five GBBs

mobilized Rs. 1.2 billion sharing 10.7 percent stake. As compared to total

liabilities of these institutions, the share of deposit mobilization remained at

22.5 percent. Out of total deposits, compulsory deposits shared 36.7 percent.


70 | P a g e

Total borrowing of such banks increased by 37.2 percent to Rs. 27.7 billion

during the review period. The GBBs borrowed Rs. 3.5 billion contributing

12.4 percent in total borrowing. As compared to total liabilities of MFFIs,

the share of borrowed amount remained at 56.5 percent.

3.59 The total amount of overdue loan including interest of these institutions

decreased by 1.0 percent to Rs. 908.1 million as compared to the same

period last year. Five GBBs' overdue loan accounted Rs. 718.8 million with

a significant share of 79.2 percent of total overdue of MFFIs. The number of

overdue borrower of MFFIs has also decreased by 14.4 percent to 30,581

persons during the review period. Out of this, the number of overdue

borrower of GBBs share 69.4 percent. Likewise, the amount of loan loss

provision of those institutions increased by 19.3 percent to Rs. 817.8

million, during the review period. The GBBs had loan loss provision of Rs.

313.2 million with a share of 38.3 percent.

3.60 Regarding the asset quality, the overall ratio of non-performing loan of

MFFIs has remained at 1.2 percent during the review period. This indicates

that the ratio of overall NPL of MFFIs is remaining within the acceptable

range of 5 percent. The overall net profit of the MFFIs stood at Rs. 1.2

billion recording a net loss in five of these institutions. Among these five

MFFIs, two of them were GBBs. The overall return on asset (ROA) ratio of

MFFIs has remained 2.4 percent in mid-July 2014 while their return on

equity (ROE) ratio remained at 21.6 percent. Regarding the liquidity

position, the liquid asset of MFFIs increased by 47.0 percent to Rs. 9.3

billion during the review period. The total liquid assets of MFFIs hold 18.9

percent of their total assets. The liquid asset of the five GBBs stood at Rs.

1.0 billion sharing 10.9 percent of total liquid assets of MFFIs.


P a g e | 71

Table 3.4: Major Indicators of MFFIs (amount in million Rs.)

Particulars Mid-July 2013 Mid-July 2014

No. of MFFIs 31 37

No. of Branches of MFFIs 646 851

No. of Branches of GBBs 161 170

Total Members of MFFIs 1252353 1616367

Members of GBBs 186056 191781

Total Capital of MFFIs (Rs.) 3801.33 5723.28

Capital of GBBs (Rs.) 488.40 596.91

Total Paid-up Capital of MFFIs (Rs.) 2234.03 2903.49

Paid-up Capital of GBBs (Rs.) 392.06 408.57

Total Assets of MFFIs (Rs.) 35750.69 49092.50

Assets of GBBs (Rs.) 5573.14 6404.08

Total Loan and Advances of MFFIs

(Rs.)

23392.23 35429.67

Loan and Advances of GBBs (Rs.) 3373.57 3879.84

Total Deposit of MFFIs (Rs.) 7225.43 11041.95

Deposit of GBBs (Rs.) 1030.36 1196.56

Total Overdue Loan of MFFIs (Rs.) 917.06 908.07

Overdue Loan of GBBs (Rs.) 721.78 718.78

Total NPL of MFFIs (Rs.) N.A 439.81

NPL of GBBs (Rs.) N.A 324.23

Rural Self-Reliance Fund (RSRF)

3.61 The Rural Self Reliance Fund (RSRF) was instituted in 1991 with the joint

efforts of NRB and the Government of Nepal. The objective of the Fund is

to work for gradual poverty reduction by providing wholesale credit to those

cooperatives and the NGOs which are involved in providing lending needs

of the poor section of the people at subsidized rate of interest. The total

capital of the fund as of mid-July 2014 reached Rs. 793.4 million with Rs.

540.0 million contributed by the government and Rs. 253.4 million by the

central bank. The loan limit per individual borrower has been set at Rs.

90,000. As of mid-July 2014, total loan of Rs. 1.5 billion has been disbursed

through this fund to 940 institutions throughout 68 districts benefitting 46

thousand deprived-households. The recovery rate was more than 96 percent

during the review period.

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Cooperatives, FINGOs and Other Financial Intermediaries

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CHAPTER - FOUR

5 COOPERATIVES, FINGOS AND OTHER FINANCIAL

INTERMEDIARIES

Performance of Cooperatives

NRB Licensed Cooperatives

4.1 Nepal Rastra Bank had licensed some cooperatives to carryout limited

banking function in 1990s. As of mid-Jul 2014, 15 cooperatives are carrying

out limited-banking activities. The number was 16 in mid-July 2013.

Among these, National Cooperative Development Bank (NCDB) is licensed

for wholesale business. The total assets/liabilities of these institutions

increased by 36.4 percent to Rs.21.0 billion and total capital fund increased

by 19.1 percent to Rs. 1.4 billion. Similarly, total deposits of these

cooperatives increased by 39.2 percent to Rs.15.9 billion in mid-July 2014

and loans and advances increased by 25.0 percent to Rs. 11.8 billion.

GON licensed Cooperatives

4.2 Over the period, cooperatives have emerged as one of the major pillar of the

economic as well as financial sector of the country. With significant

presence in rural areas, cooperatives have been lubricating rural economy.

Similarly, they have been providing direct employment to 54,143 people,

while indirect employments through micro-entrepreneurship remain

unaccounted. On the financial front, cooperatives account for around 10.0

percent of total deposit and credit of NRB regulated financial institutions as

per data of mid-July 2014. On this backdrop, cooperative sector demand

proper regulatory and supervisory framework and it's high time to mull over

it.

4.3 As per statistics available from Department of Cooperative, total of 31,177

cooperatives are operating throughout the country, which reported a modest

growth of 5.6 percent in one year to mid-July 2014. Savings and Credit

cooperatives account highest number with 13,368 and 42.9 percentage in

overall distribution.


74 | P a g e

4.4 Cooperatives are supposed to be a helping hand in expanding and deepening

financial access in rural areas of the country. However, their overly

concentration in cities and easily accessible areas may defy or weaken this

normal presumption. The regional distribution of cooperatives shows that

they have enormous presence in Central Development Region while low

presence in Far-Western Development Region.

4.5 As of mid-July 2014, total deposits of cooperatives totaled Rs.172.5 billion

registering a moderate growth of 9.1 percentage over last fiscal year, while

savings accounts saw a growth of 4.7 percentage to react at 4,555,286

members. Paid-up capital of cooperative is at Rs.61.2 billion after recording

a massive growth of 82.9 percent. Similarly, total funds of the cooperative

42.88%

13.20%

25.88%

5.56%

4.57% 7.92%

Figure 4.1: Structure of Cooperatives

Savings and Credit Multipurpose Agriculture Milk Consumer Others

18.37%

48.76%

15.79%

10.72%6.35%

Figure 4.2: Regional Distribution of Cooperatives

Eastern Central Western Mid-Western Far-Western


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recorded a robust growth of 44.6 percentages to reach Rs.6.5 billion in a

year to mid-July 2014. The statistics show that they have achieved a healthy

growth of 15.5 percent in loan outstandingto Rs.154.4 billion, while

investments, which have meager share in uses of funds, recorded a huge

growth of 72.7 percent to Rs.171 million.

Table 4.1: Capital, Savings and Loans and Advances of Cooperatives

(in billion Rs.)

Fiscal

Year

Share

Capital

Growth

(in

percent)

Savings

Growth

(in

percent)

Loans and

Advances

Growth

(in

percent)

2010-11 20.23 N/A 117.30 N/A 116.84 N/A

2011-12 27.10 33.97 139.54 18.97 134.03 14.72

2012-13 33.45 23.46 158.16 13.34 133.83 -0.15

2013-14 61.19 82.91 172.53 9.08 154.63 15.55

Source: Department of Cooperative, GON

Table 4.2 Growth in Numbers of Cooperatives over the years

Fiscal Year Total: Number Growth (Number) Growth (in percent)

2001-02 4349 0 0

2002-03 4860 511 11.75

2003-04 5671 811 16.69

2004-05 6484 813 14.34

2005-06 7074 590 9.10

2006-07 7445 371 5.24

2007-08 7598 153 2.06

2008-09 8045 447 5.88

2009-10 8530 485 6.03

2010-11 9720 1190 13.95

2011-12 11302 1582 16.28

2012-13 15813 4511 39.91


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Fiscal Year Total: Number Growth (Number) Growth (in percent)

2013-14 20102 4289 27.12

2067-68 23301 3199 15.91

2068-69 26500 3199 13.73

2069-70 29526 3026 11.42

2070-71 31177 1651 5.59

Source: Department of Cooperative, GON

Financial Non-Government Organizations

4.6 NRB has been gradually depleting the numbers of Financial Intermediary

Non-Government Organizations (FINGOs) by allowing themselves to

transform as 'D' class microfinance financial institutions. This step has been

taken toimprove the regulatory practices in FINGOs and allow them to

expand their horizon for expanding and deepening financial assess.

Deadline for this transformation has been set for mid-July 2015. As of mid-

July 2014, numbers of FINGOs have come down to 29 from 31 in mid-July

2013. These FINGOs collectively held deposits of Rs.11.1 billion and

disbursed Loans and advances of Rs.35.8 billion as of mid-July 2014.

Similarly, they have investments totaling Rs.3.0 billion. They had collective

assets and liabilities of Rs.5.1 billion by the end of last fiscal year (i.e. mid-

July 2014).

Other Financial Institutions

Insurance Companies

4.7 Nepalese insurance sector comprises of 25 insurance companies – 16 non-

life, 8 life and one life and non-life both (Table 4.3). Rastriya Beema

Sansathan, government owned company, is the only company providing

both types of insurance services. However, the company is in the process of

spearheading its businesses.

4.8 According to the data received from Insurance Board of Nepal, total

assets/liabilities of insurance companies have shoot up by 24.6 percent in a

year to record Rs.101.1 billion as of mid-July 2014. Likewise, total


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premium collections (excluding Rastriya Beema Sansthan) recorded a

double-digit growth of 14.4 percent to reach Rs.28.4 billion.

Table 4.3 Number of Insurance Companies

Ownership Non-Life Life Life & Nonlife Total

Government Owned 0 0 1 1

Private Sector 13 6 0 19

Foreign 2 1 0 3

Joint Venture 1 1 0 2

Total 16 8 1 25

Source: Insurance Board

Employee Provident Fund (EPF)

4.9 Data retrieved from Employee Provident Fund (EPF) show increment of

assets/liabilities by 17.1 percent in FY 2013/14 to reach 170.6 billion.

Likewise savings grew by 16.9 percent to 163.7 billion. As of Mid-July

2014, EPF has 490 thousands contributors from 28 thousands offices.

4.10 EPF savings have grown steadily over the years to shape significant size in

overall financial market. Total savings of EPF roughly account for nine

percentage of NRB regulated financial institutions, while its assets

weightaround seven percentages of total assets held by the same.

Citizen Investment Trust (CIT)

4.11 Citizen Investment Trust (CIT) recorded a surge in assets/liabilitiesby 27.8

percent to reach Rs. 54.6 billion during ayear to mid-July 2014. Statistics

and information from the Trust showed that this growth was propelled from

strong growth in collections which recorded a robust growth of 28.4

percentage during a year to reach 51.8 billion in mid-July 2014. Likewise

CIT recorded a whopping increase in loan and advances by 52.5 percent to

reach 17.9 billion in the review period.


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Postal Savings Bank

4.12 Postal Savings Bank has mobilized deposit of Rs.1.6 billion in mid-July

2014, while outstanding loan in ther review period stood at Rs.462.7

million. The bank has been operating under government of Nepal's

Department of Postal Services. It has 117 licensed offices to provide limited

banking services (deposit taking and loan disbursement) in different

location, of which 68 offices are operational.

Table 4.4 Status of Postal Savings Bank

Particulars Mid-July 2013 Mid-July 2014

Numbers of offices approved for deposit

collection 117 117

Numbers of offices collecting deposits 68 68

Number of offices disbursing loans and

advances 49 49

Total Account-holders 60,424 62,242

Total Deposits (Rupees in billions) 1.397 1.581

Total Loan Outstanding (Rupees in millions) 507.3 462.7

13.84%

48.18%

32.78%

5.20%

Figure 4.3: Uses of Funds of CIT

Liquid Assets Investments Loans and Advances Other Assets


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Deposit and Credit Guarantee Corporation

4.14 Deposit and Credit Guarantee Corporation (DCGC), with the view to

protecting the financial system of Nepal and contributing to financial

stability, is committed to ensure the interest of the depositors by broadening

the financial safety net which involves the provision of a deposit guarantee

that protects depositors against the loss of their guaranteed deposits placed

with BFIs in the case of unlikely event of the BFIs failure. DCGC has given

the statutory responsibility to perform both the deposit guarantee and credit

guarantee function through Company Act. DCGC has fixed the premium

rate of 0.2 percent on guaranteed deposit to all BFIs member institutions.

The coverage of deposit guarantee is limited to Rs 0.2 million per natural

individual depositors per member institution applicable on a combination of

saving and fixed deposit. As of mid-July 2014, DCGC has guaranteed

deposit amounting to Rs. 252.8 billion of 9.8 million depositors. The

guaranteed deposits are from 31 commercial banks, 86 development banks,

58 finance companies and two microfinance financial institutions.

4.15 In the context of Credit guarantee, DCGC provides guarantee to the credit

given by BFIs presently in (i) micro finance an deprive sector credit; (ii)

small and medium enterprises (SMEs) credit and (iii) livestock credit and to

compensate the loss under a risk sharing modality as per the concerned

regulation in case of proven death and permanently infertile of livestock and

indisputable of other loans. NRB has made provision to make loan loss

provision of only 25.0 percent if the loan issued by licensed BFIs is

guaranteed by DCGC. As of mid-July, it has guaranteed total loan of

Rs.609.6 million including loans for small and medium enterprises and

micro financing. The low volume of credit guarantee could be attributed to

the low participations of BFIs in credit guarantee scheme. While NRB has

made mandatory requirement for deposit guarantee, it has not yet made such

requirement for credit guarantee. As of mid-July 2014, only a commercial

bank is in DCGC's credit guarantee portfolio. Similarly, development banks

count to four and MFFIs five.

4.13 Deposit insurance is an integral part of the Financial Safety Net of the

country. It is the system whereby depositors are protected against the loss of

their deposits in the event of the bank‘s failure. It helps to gain public

confidence in BFIs through safeguarding small depositors who are the most


80 | P a g e

vulnerable segment of the population against losses they may face as a

result of the failure of banks. Moreover, the availability of deposit insurance

protects banks against the risk of 'bank runs' and therefore contributes to

financial stability. NRB has introduced policy provisions with the motive of

enhancing public confidence towards the financial system, for insuring

deposit up to Rs 0.2 million of small and medium size depositors. In this

regard, NRB has issued circulars on August 9, 2010 for ‗D‘ class & on

February 2011 for ‗B‘ & ‗C‘ class FIs and on July 18, 2011 for ‗A‘ class

commercial banks regarding the provision of deposit guarantee up to Rs 200

thousand in saving and fixed account held by natural person . In addition, a

circular was also issued on September 20, 2011 to gradually increase the

threshold of deposit guarantee up to Rs. 500 thousand.

Financial Markets

P a g e | 81

CHAPTER - FIVE

6 FINANCIAL MARKETS

Global Financial and Money Market Perspective

5.1 Since the financial crisis that began in 2007, the Federal Reserve took

extraordinary actions in response to the financial crisis to help stabilize the

U.S. economy and financial system. These actions included reducing the

level of short-term interest rates to near zero. In addition, to reduce longer-

term interest rates and thus provide further support for the U.S. economy,

the Federal Reserve purchased large quantities of longer-term Treasury

securities and longer-term securities issued or guaranteed by government-

sponsored agencies such as Fannie Mae or Freddie Mac. Low interest rates

are continuing to help households and businesses finance new spending and

help support the prices of many other assets, such as stocks and houses.

Keeping with the momentum and to support continued progress toward

maximum employment and price stability, the Federal Reserve Open

Market Committee has not changed the current 0 to 0.25 percent target

range for the federal fund.

5.2 The discount rate for 3-Month US Treasury Bills has remained near to zero

since 2009 thanks to the Fed's decision to provide fed funds at 0 to 0.25

percent. The average monthly rate for July 2014 was 0.03 percent, a

decrease from 0.04 percent in the same period of 2013, while the

comparable figure was 0.1 in 2012.

Source: Federal Reserve System

0

1

2

3

4

5

20

07

-01

20

08

-01

20

09

-01

20

10

-01

20

11

-01

20

12

-01

20

13

-01

Figure 5.1: Three-Month US Treasury Bills Monthly

Average Interest Rate


82 | P a g e

5.3 The interest rate on long term US Treasuries has been highly volatile since

the financial crisis of 2008. After dropping to the minimum rate of 1.53 in

July, 2012 aftermath of the great recession, it's slightly moving upwards. As

of July 2014, these long term government bonds had interest rate of 2.54

percentages, down from the reading of 2.58 on July 2013

Source: Federal Reserve System

US Dollar Index

5.4 The U.S. Dollar Index consists of a geometric weighted average of a basket

of six major foreign currencies – Euro 57.6 percent, Japanese yen 13.6

percent, Pound sterling 11.9 percent, Canadian dollar 9.1 percent, Swedish

kroner 4.2 percent and Swiss franc 3.6 percent weight– against the dollar.

The index4 is calculated by factoring in the exchange rates of these

currencies. The US dollar index depreciated by 3.03 percent from 83.20 in

mid-July 2013 to 80.64 in mid-July 2014. The depreciation was result of

stronger Yen and relatively stable Pound.

4 Dollar index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120

would suggest that the U.S. dollar experienced a 20 percent increase in value over the time period.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

5.5

Figure 5.2: Ten-Year US Treasury Constant Maturities

Monthly Average Interest Rates

Financial Markets

P a g e | 83

Source: www.investing.com

Domestic Financial Market

Money Market

5.5 Short term interest rates in the financial market remained low in 2013/14.

The weighted average 91-day Treasury bill rate stood at 0.02 percent in

mid-July 2014 compared to 1.19 percent a year ago. In mid-July 2014, the

weighted average inter-bank rate among commercial banks declined to 0.16

percent from 0.86 percent of mid-July 2013. Likewise, the weighted average

inter-bank rate among other financial institutions declined to 2.40 percent in

mid-July 2014 from 5.03 percent a year ago.

7778798081828384

Figure 5.3: US Dollar Index Daily Movement

0

1

1

2

2

3

3

4

28 days 91 day s 182 days 364 days

Figure 5.4: Weighted Average Treasury Bill Rate

2011/12 2012/13 2013/14


84 | P a g e

5.6 The implementation of base rate has been continued with the objectives of

reducing the spread rate and improving the effectiveness of monetary policy

by making lending rate more transparent and competitive. As per the

modified method of spread rate calculation, the weighted average interest

rate spread of commercial banks stood at 5.2 percent (excluding,

Agricultural Development Bank Limited) in mid-July 2014. Moreover, the

average base rate of commercial banks remained at 8.4 percent in mid-July

2014 compared to 9.8 percent a year ago.

Securities Market

5.7 Remarkable improvement has been observed in securities market in 2013/14

due mainly to renewed confidence of investors after the second Constituent

Assembly Election. The y-o-y NEPSE index, increased by 99.9 percent to

1036.1 points in mid-July 2014 compared to 33.0 percent to 518.3 points in

mid-July 2013. NEPSE sensitive index stood at 222.5 point in mid-July

2014, as against 130.3 in mid-July 2013.

0

1

2

3

4

5

6

7

8

9

2010/12 2012/13 2013/14

Figure 5.5: Weighted Average Inter-bank Rate

Among Commercial Banks Among Others

Financial Markets

P a g e | 85

5.8 The y-o-y market capitalization increased by 105.5 percent to Rs.1057.2

billion in mid-July 2014 from mid-July 2013. As a result, the ratio of market

capitalization to GDP stood at 54.8 percent in mid-July 2014 compared to

30.4 percent in mid-July 2013. Of the total market capitalization, the share

of BFIs (including insurance companies) stood at 77.6 percent while that of

manufacturing and processing companies, hotels, business entities,

hydropower and other sectors stood at 1.9 percent, 2.4 percent, 0.1 percent,

8.7 percent and 9.3 percent respectively.

5.9 Total number of companies listed at the NEPSE increased from 230 in mid-

July 2013 to 237 in mid-July 2014. Of the total listed companies as of mid-

July 2014, the number of banks and financial institutions (including

insurance companies) stood at 204 followed by production and processing

industries (18), hotels (4), business entities (4), hydropower (5) and other

companies (2).

5.10 Total paid-up capital of the listed companies stood at Rs. 146.5 billion in

mid-July 2014, registering an annual growth of 16.2 percent. Such an

increase in paid-up capital was due to the listing of additional securities at

the NEPSE. In 2013/14, additional securities which included Rs. 7.6 billion

ordinary shares, Rs. 7.1 billion bonus shares, and Rs. 6.0 billion right shares

were listed at the NEPSE. In addition, commercial banks' bond of Rs. 2.3

billion was also listed at the NEPSE.

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

2011/12 2012/13 2013/14

Figure 5.6: NEPSE and Sensitive Index

NEPSE Index NEPSE Sensitive Index


86 | P a g e

Foreign Exchange

5.11 The gross foreign exchange reserves increased by 24.8 percent to Rs. 665.4

billion in mid-July 2014 from a level of Rs. 533.3 billion in mid-July 2013.

Such reserves had increased by 21.4 percent in the previous year. Out of

total reserves, NRB's reserves increased by 26.4 percent to Rs. 572.4 billion

in the review year from a level of Rs. 453.0 billion in mid-July 2013. In

USD terms, the convertible foreign exchange reserves increased by 22.9

percent to USD 5.35 billion in mid-July 2014 from the level of mid-July

2013.

5.12 Likewise, inconvertible foreign exchange reserves increased by 27.4 percent

to INR 94.9 billion exceeding previous year's increase of 23.4 percent. On

the basis of the trend of imports, the existing level of reserves is sufficient

for financing merchandise imports of 11.5 months and merchandise and

service imports of 10 months.

Financial Sector Policies and Infrastructures

P a g e | 87

CHAPTER - SIX

7 FINANCIAL SECTOR POLICIES AND

INFRASTRUCTURES

International Financial Regulatory Reforms And Nepal

6.1 The 2008 financial crisis revealed major problems in the regulation and

management of financial institutions across the world. Over the past five

years, G20 members have agreed, and are implementing, a broad range of

policy reforms to promote financial stability and support strong, sustainable

and balanced growth. The G20‘s financial regulatory reform agenda is

coordinated by the Financial Stability Board (FSB)5, which reports to the

G20 on its progress in developing and implementing reforms. In 2014, FSB

focused on completing the core aspects of the four fundamental areas of the

G20 led international financial regulatory reforms: (i) Building resilient

financial institutions by fully implementing the Basel III capital standards,

(ii) ending too big to fail, (iii) addressing shadow banking through

increasing regulations and (iv) making derivatives market safer. However,

the varied pace of implementation of some of the reform measures across

jurisdictions with hints of ‗national‘ approaches, underscore the need for

adopting and adapting reform measures according to specific priorities.

Basel III Regulations and Liquidity Risk Framework

6.2 Stronger regulatory standards are being phased in for banks and other

financial institutions globally among which Basel III reforms, developed by

Basel Committee on Banking Supervision (BCBS), is effort to enhance the

banking regulatory framework. Basel III is a comprehensive set of reform

measures aimed at strengthening the regulation, supervision and risk

management of the banking sector so that it is better able to absorb shocks

arising from financial and economic stress, thereby reducing the risk of

spillover from the financial sector to the real economy. It builds on the

International Convergence of Capital Measurement and Capital Standards

document (Basel II). Basel III is to be implemented in several steps by 2019,

5G20 leaders established the FSB in 2009 to coordinate the work of national financial authorities (including

G20 countries) and international standard-setting bodies to develop and promote the implementation of

effective regulatory, supervisory and other financial sector policies.


88 | P a g e

with the goal of promoting a more resilient banking sector globally. In

context of Nepal, Nepal Rastra Bank (NRB) is taking the necessary

measures to ensure the implementation of Basel III provisions. Accordingly,

with the objective of Nepalese commercial banks to be fully compliant with

the Basel III regulatory framework a consultative document for Basel III

implementation ―A study on Basel III and Nepalese Banking: An

Assessment of Capital Regulation in Nepal‖ has been prepared and

published in NRB website to collect the opinions/suggestions of

stakeholders. According to the implementation schedule of Basel III in the

consultative document, Nepalese commercial banks will be fully compliant

with the Basel III regulations by 2019 starting early 2015, which will help

further strengthen financial system stability in the country.

Basel III Liquidity Risk Framework

6.3 Regulations under Basel I and Basel II were concentrated mainly on capital

but after the global financial crisis liquidity problems were seen in many

banks even they had adequate capital levels because they did not manage

their liquidity in a prudent manner. So, enhancing international capital and

liquidity standard for banks through the Basel III reforms was a central

element of the global policy response to the crisis. In January 2013, BCBS

released final rules on Liquidity Coverage Ratio (LCR) and liquidity risk

monitoring tools where the LCR will be introduced as planned on 1 January

2015, but the minimum requirement will begin at 60 percent, rising in an

equal annual step of 10 percent points to reach 100 percent by 1 January

2019. In this context BCBS has issued guidelines, ―Basel III: The Liquidity

Coverage Ratio and liquidity risk monitoring tools (January 2013)‖6. The

objective of LCR is to promote the short-term resilience of the liquidity risk

profile of banks. It does this by ensuring that banks have an adequate stock

of unencumbered high-quality liquid assets (HQLA) that can be converted

easily and immediately into cash to meet their liquidity needs. Basel III has

also introduced another ratio called Net Stable Funding Ratio (NSFR) which

aims to promote resilience over longer term through incentives for banks to

fund activities with more stable sources of funding.

6For more details see:- BCBS, ―Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring

(January 2013); http://www.bis.org/publ/bcbs238.pdf .


P a g e | 89

6.4 NRB has developed its own liquidity monitoring framework for the short-

term liquidity monitoring of the banks. The ratio defined in the framework

is very similar to LCR. For the long term liquidity monitoring, mechanism

to monitor Net Stable Funding Ratio (NSFR) has to be developed. Banks

and Financial institutions of Nepal need to maintain Cash Reserve Ratio

(CRR) within NRB. Similarly they need to maintain the statutory liquidity

ratio (SLR) by investing in specified assets as prescribed by NRB. At

present context, ―A‖, ―B‖, ―C‖ and ―D‖ class BFIs are required to maintain

CRR of 6 percent, 5 percent, 4 percent and 2 percent respectively. Similarly,

―A‖, ―B‖, ―C‖ and ―D‖ class BFIs are required to maintain SLR of 12

percent, 9 percent, 8 percent and 4 percent respectively, however, ―B‖ and

―C‖ class FIs not taking current and call deposit are required to maintain

only 6 percent. BFIS can invest in government securities for SLR purpose7.

Banks stay invested in SLR eligible securities, which are akin to HQLA, not

only to comply with statutory obligations, but also due to other factors such

as risk free status, a high collateral value and their importance in accessing

central bank liquidity window. In addition, banks are also required to

maintain CCD Ratio (80 percent) and net liquid assets to total deposit ratio

(20 percent). So, in current context, initiating new liquidity requirement as

per Basel II will not be a very new and complex issue as the liquidity-

monitoring framework, which is very similar to LCR of Basel III is under

implementation process and only some exercise is necessary to initiate the

Net Stable Funding Ratio.

7For circular of CRR:- http://bfr.nrb.org.np/circular/2071-72/2071_72_For_A_,_B_&_C_Class--Circular_01-

%20Cash%20Reserve%20Ratio.pdf

For circular of SLR:- Unified Directive 2013, Directive no. 13 http://bfr.nrb.org.np/directives/Directives--

Unified%20Directives%202071-NEW.pdf


90 | P a g e

Capital Adequacy

6.5 Basel III introduced new capital framework that has prescribed that Tier 1

capital should consists of common equity and retained earnings. According

to the new capital framework, tier 1 capital must be at least 6 percent of

risk-weighted exposures (RWE) where common equity Tier 1 must be at

least 4.5 percent and additional tier 1 must be 1.5 percent of risk weighted

exposures at all times. The tier 2 capital must be at least 8 percent of risk-

weighted exposure at all times. In Nepalese context, according to the new

capital adequacy framework 2007, Tier 1 capital requirement is 6 percent of

RWE and tier 2 capital is 10 percent of RWE. These ratios are already

higher than the global standard for capital adequacy prescribed under Basel

II.

Box 6.1: Capital Regulation in Nepal

Class A institutions (commercial banks) are reporting their capital

adequacy requirement in accordance with the new capital adequacy

framework under Basel II capital accord issued through Directive No.1 of

the Unified Directives. Other institutions are still computing and reporting

their capital adequacy according to Basel I framework. The new

framework is under parallel run for the national level Development Banks

(B class financial institutions) in Nepal.

Capital Adequacy Framework 2007 (updated 2012) was issued for the first

time in 2007. Implementation of Basel II was initiated after one year of

parallel run of Basel I and Basel II (simultaneously) in Commercial

Banks. It has been six years of successful implementation of Basel II in

Nepalese Commercial Banks.

The new capital adequacy framework, also known as Basel II, includes

three pillar approach; Minimum Capital Requirements, Supervisory

Review process and Disclosure requirements. The first pillar includes the

risk measurement approaches viz. Simplified Standardized Approach

(SSA) for credit risk, Basic Indicator Approach (BIA) for operational risk

and Net Open Position Approach (NOPA) for market risk. These

approaches seem to be the simplest approaches for measurement of risks

under Basel II although there are also other advanced approaches for risk

measurement.


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Ending “Too-Big-To-Fail”

6.6 The "too big to fail" associated with Systemically Important Financial

institutions (SIFIs) are so large and so interconnected that their failure

would be disastrous to the greater economic system. Global financial crisis

taught an important lesson that excessive interconnectedness among

systemically important banks transmits shocks across the financial system

and economy as whole. FSB has taken various efforts to address the ―too

big to fail‖ problem. It has developed a broader policy framework which

covers higher capital charges, enhanced resolution regimes, recovery and

resolution planning, and more intensive supervision for SIFIs. Similarly,

under Basel III, SIFIs must have loss absorbing capacity beyond the

minimum standard. The global systemic important Banks (G-SIBs) should

attract additional layer of regulatory capital. The framework suggests G-

SIBs to hold extra common equity tier 1 capital between 1 percent and 2.5

percent of risk-weighted exposure.

6.7 There is no Nepalese bank in the list of G-SIBs published by FSB.

However, there are some domestic systemically important banks (D-SIBs)

which are huge in assets size and Balance sheet BCBS has issued a

framework for dealing with D-SIBs wherein the countries need to develop

assessment and supervisory framework for D-SIBs. In Nepalese context,

proper mechanism should be developed to classify banks on the basis of

their systemic presence domestically and specific regulations for such D-

SIBs. The country should identify D-SIBs and indicators which will be used

for assessment are comprised of size, interconnectedness, substitutability

and complexity wherein the larger weight around 40 percent should be

given to size than to the other indicators. D-SIBs need to have an additional

common equity Tier 1 capital requirement ranging from 0.2 percent to 0.8

percent of the risk weighted assets. D-SIBs will also be subjected to

differentiated supervisory requirements and higher intensity of supervision

based on the risks that they pose to the financial system.

Resolution Regime and Lender of the Last Resort

6.8 To address ―too-big-to-fail‖ issue, it requires effective national resolution

regimes and recovery and resolution planning. FSB with the view to address


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the ―too-big-to-fail‖ problem published a new internationally-agreed

standard ―Key Attributes of Effective Resolution Regimes for Financial

Institutions‖ that sets out the responsibilities, instruments and powers that

national resolution regimes should have to resolve a failing SIFIs in an

orderly manner. NRB has developed "Problem Bank Resolution Framework

(PBRF)" which spells out the detail policies and procedures for

identification of problem bank and financial institutions, intervention

efficiency of resolution within the existing legal and regulatory framework

that ensures prompt and effective resolution. The prevailing NRB Act still

requires a Court Order to dissolve a problem BFIs. This framework gives

NRB the power of making a decision of dissolution of problem institution if

proposed amendment in BAFIA and NRB act comes in place. Besides, the

framework has also put forward the concept of bridge institution; the

institution that works as the bridge between the problem institution and

public at large until the settlement or dissolution takes place.

6.9 NRB has recently established a separate division as Problem Bank

Resolution Division (PBRD) headed by Director who will directly report to

the Deputy Governor for the effective management of problem banks and

financial institutions. After establishment of this division, it will help to

manage weak banks and financial institution in an objective, transparent and

cost effective manner so as to ensure stability in the financial system.

Furthermore, NRB has issued a bylaw, ―Resolution Bylaw 2014‖ for the

purpose of implementation of the framework.

6.10 The current Resolution framework is not specifically targeted to SIFIs, and

there is need to develop proper regime to identify SIFIs and effective

resolution framework for SIFIs in the country.

6.11 For developing an effective resolution regime for financial institutions, the

lender-of-last-resort (LOLR) function of central bank should be improved.

NRB needs to play the role of the lender of the last resort to safeguard the

stability of the financial system. NRB has issued policy on lender of the last

resort in 2011. As a LOLR, NRB provides special liquidity facilities to BFIs

which need to be revived due to its systemic important role on economy and

financial system.


P a g e | 93

Regulation of Shadow Banking

6.12 ‗Shadow banking system broadly described as credit intermediation

involving entities and activities outside regular banking system which are

potential source of systemic risk, and those are not subject to regulatory

oversight. The FSB suggest appropriate monitoring and regulatory

frameworks for the shadow banking system to be in place to mitigate the

build-up of risks. The FSB has focused on five specific areas in which

policies are needed to mitigate the potential systemic risks associated with

shadow banking: (i) to mitigate the spill-over effect between the regular

banking system and the shadow banking system; (ii) to reduce the

susceptibility of money market funds (MMFs) to ―runs‖; (iii) to assess and

align the incentives associated with securitization; (iv) to dampen risks and

pro-cyclical incentives associated with securities financing transactions such

as repos and securities lending that may exacerbate funding strains in times

of market stress; and (v) to assess and mitigate systemic risks posed by other

shadow banking entities and activities.

Table 6.1: Shadow assets

Area 2002 2007 2011 2012 2013

Global (20

jurisdiction)

USD 26

trillion

USD 62

trillion

USD 67

trillion

equivalents

to 111

percent of

total GDP

USD

70trillion

USD

75trillion

\Source: Global Shadow Banking Monitoring Report 2013

6.13 In the context of macro-financial linkage, the major challenges in term of

shadow banking is regulatory arbitrage where funds move between

regulated and unregulated banking system. The regulations issued by NRB

are applied to banks and financial institutions licensed by NRB only. The

other risk of shadow banking is contagion risk where Shadow banking

entities have close inter-linkages with the banking sector both from the asset

as well as the liabilities side, and also with other segments of the financial

system, which can lead to contagion risk in times of loss of confidence and


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uncertainty. In the country, unregulated institutions flow loans heavily on

unproductive sector which have adverse effect on an economy.

6.14 Furthermore, in Nepal, cooperatives and other unregulated entities (money

lenders, dhukuties) are flowing huge credit in unproductive sector like real

estate, automobiles and other consumable goods which can raise aggregate

demand of economy and suppose to raise the price level. Moreover, as

Nepal is dependent on import, increase in consumption has negative effect

on country's BOP. A study conducted by NRB revealed that the informal

credit market is charging relatively high interest rates on loans provided to

individuals. Similarly, the NLSS report (2010/11) shows that only 30-40

percent of lending in Nepal is provided from formal financial institutions.

Table 6.2: Household loan from different sources (in percent)

Particulars NLSS I

(1995/96)

NLSS II

(2003/04)

NLSS III

2010

Loans from Banks 16.2 15.1 20

Loans from

Money lenders 39.7 26 15.1

Loans from

Relatives 40.8 54.5 51.1

Source: Nepal Living Standard Surveys

Other Major Developments in Financial Sector

Assessment of Basel Core Principles

6.15 The stability and dynamism of the banking sector is influenced by the

regulatory framework that is in force. Complying with a regulatory

framework that is on par with international standards will benefit banks by

helping them earn public confidence and compete in international markets.

Timely adoption of regulatory reforms will also be important in

safeguarding the stability of financial system. Central banks worldwide

conduct a self assessment of their adoption of the 29 principles of the Basel

Core Principles. The aim of such assessments is to understand the level of

adoption of the Basel principles and find out areas of improvements. In

coordination with the World Bank and IMF, NRB has conducted self-


P a g e | 95

assessment of the Basel Core Principles and assessed the gap in

implementation of the BCPs. The IMF Financial Sector Assessment

Program for the BCP has reviewed the self-assessment. The gap analysis

shows that a lot of work needs to be done to move to establish best practices

in banking as recommended by the Basel Committee. Many of the 29 core

principles are not compliant or materially noncompliant. A lot of work

needs to be done on legal front to work for the compliance of the principles,

NRB slowly but steadily aims to work to comply with all the 29 core

principles.

Anti-Money Laundering (AML)/Combating the Financing of Terrorism

(CFT) Regime

6.16 The Asset (Money) Laundering Act 2008 (ALPA first amendment 2011)

came into force in 2008. The act provides a supervisor power to sanction the

BFIs not complying AML/CFT laws and regulations. NRB has issued

directive8 on "Anti Money Laundering and Combating Financial Terrorism"

to licensed BFIs and these Directives have been issued having exercised the

powers conferred by section 7 (o) & 7 (p) and section 79 of the Nepal Rastra

Bank Act, 2002. Accordingly, NRB has issued directives to BFIs to comply

with policies on AML/CFT wherein BFIs are required to carry Risk based

Customer due Diligence (CDD), enhanced customer Due Diligence (ECDD)

for high risk customer and Simplified Customer Due Diligence for low risk

customer. In addition, BFIs are also required to update the information of

their customers (know your customers norms); identify, evaluate the risk

details of customers; ongoing monitoring of accounts and transactions of

customers; protection of transaction details of customers, etc. The other

polices on wire transfer, correspondent banking with shell banks (banks and

financial institutions that does not have physical presence in any country),

record keeping and retention, etc. are also covered in the same directive.

6.17 NRB conducts both on-site and offsite AML/CFT supervision. NRB to

assess the adequacy of policies and internal controls of BFIs for deterring,

detecting and reporting suspected money laundering and terrorist financing

8Directive No. 19 in Unified Directive 2013, http://bfr.nrb.org.np/directives/Directives--

Unified%20Directives%202071-NEW.pdf

http://bfr.nrb.org.np/directives/Directives--Unified%20Directives%202071-NEW.pdf

http://bfr.nrb.org.np/directives/Directives--Unified%20Directives%202071-NEW.pdf


96 | P a g e

activities developed and published ―AML/CFT Questionnaire for Banks and

Financial Institutions‖9. Besides, NRB has developed AML/CFT

Supervision Manual, ‗A Manual/Handbook for Supervision and Inspection

on Anti-Money Laundering and Countering the Financing of Terrorism‘,

2013 which facilitates the supervisors for conducting on-site and offsite

supervision to ensure the compliance of AML/CFT related laws and

regulations by BFIs. To, facilitate the off-site supervision; NRB has

developed Offsite Data collection Template which are used to assess the risk

of the financial institutions. In order to ensure the BFIs have adequate

policies and procedures on AML/CFT, NRB has developed 19 examination

guidelines/procedures which assist supervisors to various areas to be

focused while conducting on-site supervision.

6.18 The Financial Intelligence Unit was established on 21 April, 2008 under the

section 9 of the Assets (Money) Laundering Prevention Act, 2008 as an

independent unit in the Nepal Rastra Bank. It is a central, national agency

responsible for receiving, processing, analyzing and disseminating financial

information and intelligence on suspected money laundering and terrorist

financing activities to the Investigation Department and other relevant law

enforcement agencies and foreign FIUs. BFIs and other entities are required

to report their STR and TTR on to FIU. Reporting entities must fill STR

within 3 days of the initial determination for the necessity of filing the

report as per Section 7S of ALPA (Second Amendment), 2008 and they are

required to file threshold transaction reports to FIU within fifteen days from

the date of transaction.

6.19 FATF‘s in its latest statement on February 2014, states Nepal is no longer

subject to FATF‘s monitoring process under its on-going global AML/CFT

compliance process as it is significantly improving its AML/CFT regime

and notes Nepal has established the legal and regulatory framework to meet

its commitments in its action plan.

9For details: http://www.nrb.org.np/bsd/bsdindex.php?vw=4.

http://www.nrb.org.np/bsd/bsdindex.php?vw=4


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Table 6.3: AML/CFT Examination Guidelines/Procedures

Guidelines/Procedures Objectives Main Elements

New Account Opening for General,

PEPs and VIP Customer To assess AML/CFT risk

in management policies,

practices, procedures and

internal controls regarding

account opening and

monitoring procedures for

PEPS are adequate with

regard to AML/CFT.

To determine if bank

personnel, including

employees, officers and

board of directors are

operating in conformity

with the established

policies and guidelines.

To determine if sufficient

documentation is

obtained.

To determine compliance

with laws and regulations.

To initiate corrective

action when policies,

practices, procedures or

internal controls are

deficient or when

violations of laws or

regulations have been

noted.

1. Corporate

Governance

and Role of the

Board

2. Policies and

Procedures:

Customer Due

Diligence

(CDD/KYC)

3. Risk

Management

4. Internal

Controls and

Internal and

External Audit

5. Compliance

6. Training and

Human

Resources

7. Reporting and

Recordkeeping

Compliance officer and compliance

function

Corporate governance and

management of the ML/TF risk

Cross border correspondent

banking. Record keeping and retention

Risk rating

(Customer/Service/Product/Geogra

phic location/Delivery Channel)

Suspicious transaction reporting

Introduced Business and Third

Party CDD Money/Funds/Wire Transfer

Staff Training

Account monitoring

Account monitoring for

establishing beneficial

owners(CDD for determining

beneficial ownership)

Threshold/Cash transaction

Enhanced customer due diligence

(ECDD Internal Auditors/External Auditors

Know Your Employees Guidelines

Electronic and internet banking

Information technology

Purchase/Sale of negotiable

(monetary) instruments

Risk Based Supervision

6.20 In the light of the global financial crisis and the recent developments in the

financial system, the focus is squarely on the ability of banks and

supervisors to understand risks inherent in banking business and to

institutionalize an appropriate architecture for effectively managing these

risks. The need for a robust supervisory framework for monitoring the risk

levels in banks‘ operations has been duly recognized by financial sector


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policy makers across the globe, more so in the wake of the financial crisis.

Accordingly, measures to strengthen supervisory oversight of banks have

been at the core of the reform process that has been since set in motion. The

present ‗supervision‘ is to be the enforcement of prudential rules (capital

adequacy, liquidity, large exposures and so forth).

6.21 Risk Based Supervision is not the application of rules and regulations in fact

it defines prudential supervisor‘s mandate extends beyond the rules to

ensuring the effective management of risks by regulated institutions –

wherever those risks might arise, and regardless of whether or not those

risks are described by prudential rules or standards. In Nepal, one important

initiative being taken by the NRB is the phased migration to a Risk Based

Supervision model, which seeks to address several of the present concerns

regarding the supervisor‘s and banks‘ ability to identify and manage the key

risks in banks‘ operations. Risk-based supervision has tools in place to help

supervisors to direct their prudential interventions at those areas which

present the greatest potential risk to an entity‘s financial soundness.

6.22 Risk-Based Onsite Inspection Manual prepared with technical support from

the IMF has been approved by the NRB board. Bank Supervision

Department (BSD) of NRB has conducted a test case of RBS in a Bank and

a full scope risk based supervision based on Risk-Based Onsite Inspection

Manual has been conducted in Nepal Bangladesh Bank Ltd. RBS for other

banks are in process and is being conducted in phase wise manner.NRB

aims to implement RBS in full phase by 2016. To complement the onsite

RBS, NRB is presently working to develop a Risk-Based Off-site Inspection

Manual.

Special Inspection of Financial Institutions

6.23 As a part of Development Policy Credit initiated by the Nepal Government,

NRB is conducting the Special Inspection of Banks and Financial

Institutions. The total number of FIs subject to the special inspection

program will be: 22 Class A, 20 Class B, and 12 Class C BFI for a total of

54. The Special Inspection Program is being carried out with technical

support from the World Bank, IMF and DFID and aims to have

comprehensive assessment of the Nepalese Financial Sector.


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Diagnostic Review

6.24 Nepal Rastra Bank conducted a diagnostic review of selected twenty banks

and financial institutions eight commercial banks, six development banks

and six finance companies in Nepalese Banking sector. The review was

done with a risk focused approach and the diagnostic was conducted with

the technical support from the International Monetary Fund. The diagnostic

reviews focused mainly on the banks governance process and structure and

the quality of the risk management frameworks, independence of the risk

assessment process, inherent risks (credit risk, market risk comprising

interest rate risk and foreign exchange risk, liquidity risk and operation risk)

within bank business lines, bank products and bank processes, analysis of

the banks operating performance and financial condition and quality and

independence of the internal audit function and the external audit function.

The risk assets of banks in the diagnostic review totaled about 30 percent of

the banking sector risk assets.

Domestic Regulatory Developments

Licensing Policy

6.25 Due to liberal licensing policy in the past, numbers of banks and financial

institutions have been increased significantly. This growing number of

financial institutions could bring unfair competition in their activities and

subsequently it will threaten to the financial stability. Keeping it in mind,

the licensing to Banks and financial institution are on moratorium except D

class financial institution and future licensing policies is under discussion.

6.36 Liberal licensing of class D institutions is one of the measures taken by

NRB to enhance the access to financial services in Nepal. Number of BFIs

increased during the last 3 decades, but the access to financial services could

not be expanded in the rural and remote areas as expected. As a result, the

licensing of the D class institutions was promoted in the rural and remote

areas where there is an absence/lack of financial services/access.


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New OMO Bylaw

6.27 NRB issued ―Nepal Rastra Bank Open Market Operation By-laws‖ to make

Open Market Operation (OMO) as a principal instrument of monetary

policy, purposeful and in order to conduct it transparently. New provisions

of the by-laws have specified three ways to address liquidity ups and downs

in the banking system: - (i) Regular OMO, (ii) Fine tuning OMO, and (iii)

structural OMO. Regular OMOs is used for seven days for managing

general type of short-term shortage/excess of liquidity seen in the financial

market. Liquidity is managed by using repo when there is shortage of

liquidity and reverse repo when there is excess of liquidity in the financial

market for a short-term. Fine tuning operation is conducted in any day of the

week if monetary liquidity fluctuate substantially causing significant ups

and downs in short-term interest rates and the financial markets seem to be

unstable. For such a fine tuning operation, which can be conducted for a

maximum of three months, repo/reverse repos as well as auction based

interest–paying deposit collection (deposit auction) instruments will be

used. Structural OMOs is used for managing long-term liquidity and

signaling monetary policy stance. For structural OMOs, outright

sale/purchase auctions and repo/reverse repo auctions of maximum of 6

months, as per necessity, is used.

6.28 Auction-based repo, reverse repo, outright sale, outright purchase, deposit

collection and NRB bonds is used as instruments for regular, fine tuning and

structural OMOs. The upper limit (cap) for individual auction of these

instruments is fixed at 2 percent of overall domestic deposit liabilities of

BFIs at a time. OMOs like outright sale, outright purchase, repo and reverse

repo auction will be based on treasury bills and development bond of the

GoN, NRB bond and other securities specified by NRB. OMOs is conducted

focusing on the overall liquidity situation of the banking sector indicated by

the report of Liquidity Monitoring and Forecasting Framework (LMFF)

prepared on the basis of this bank's balance sheet and other financial

indicators.


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Merger&Acquisition Bylaws

6.29 NRB in order to increase the financial deepening in the country, adopted

liberal licensing policy as a result number of BFIs increased significantly.

Due to huge number of BFIs, those got difficult for proper monitoring and

supervision by NRB and in many BFIs problem s started to occur which

posed greater threat to financial stability. NRB in order to tackle this

problem kept its licensing policy under moratorium to avoid new entrants in

the industry (except ―D‖ class institutions) and to regain the financial

stability in the country it encourages BFIs consolidation. NRB therefore

issued and implemented Merger Bylaws, 2011 to facilitate bank

consolidation process. The Bylaw includes specific process of merger

provisions with several incentives, regulatory relaxations and indirect

provision of forceful merger.

6.30 The merger and acquisition of BFIs has been encouraged to strengthen

financial sector stability recently Acquisition Bylaws, 2014 have been

issued to complement the consolidation process. Till date, 68 BFIs have

been merged to become 23 BFIs.

Consumer Financial Protection Guidelines and Financial Literacy Program

6.31 Consumer financial protection and financial literacy is in the limelight

aftermath of the financial crisis of 2007-08. The crisis was an eye-opener to

the exposes of the world financial system. It fundamentally changed the

traditional regime of financial market supervision and regulation adding

more layers to the surveillances. It also highlighted importance of the

consumers to the recovery of the financial system and economy as a whole.

Henceforth, world leading central bankers started recognizing the need of

financial protection against the deposits, reducing red tapes, increasing

transparency, lessening fees and charges and other ways to bolster consumer

confidence in the financial system.

6.32 Financial consumer protection guidelines are now seen as the way to help

promote a safer and sounder financial system, preventing a future crisis and

restoring consumer confidence in the financial institutions. Different

institutions have developed set of principles for consumer financial


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protection and countries have been either following or developing an own

variant. Principles devised by OECD and endorsed by G20 Finance

Ministers and Central Bank Governors are most popular among them. It has

10 basic principles.

Box 6.2 OECD Principles on consumer financial protection:

Legal, Regulatory and Supervisory Framework

Role of Oversight Bodies

Equitable and Fair Treatment of Consumers

Disclosure and Transparency

Financial Education and Awareness

Responsible Business Conduct of Financial Services Providers and

Authorized Agents

Protection of Consumer Assets against Fraud and Misuse

Protection of Consumer Data and Privacy

Complaints Handling and Redress

Competition


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Box 6.3: Major provisions proposed on the consultative directives on consumer

financial protection and financial literacy

Transparency: the directive aims to enhance transparency by making compulsory

arrangements to publicize all services and conditions including financial instruments and

fees for obtaining these services and facilities. Similarly licensed BFIs are required to

develop a booklet explaining about features of all deposit and loan services and associated

fees and charges.

Plain language: licensed BFIs are required to use plain language in notices and

information to avoid ambiguity. Furthermore, use of Nepali language has been made

mandatory for all communicative and official documents.

Easy banking services: BFIs must prioritize senior citizens and differently-abled people

and assist financially illiterate to avail the service.

Changes in fees and conditions: BFIs should inform customers about changes in pre-

agreed conditions and services through national, regional or district level newspapers

accordingly with their coverage area.

Fees on operating and closing accounts: BFIs should abstain from charging any fees for

operating or closing accounts, Any Branch Banking Services (ABBS), certification of

deposit amount or account statements and should pre-inform customers about any fees

apart from aforementioned. Furthermore, BFIs are abstained from levying annual fees for

different electronic cards but renewal fees upon expiry.

Service charge: BFIs should not charge customers in excessive of they have been charged

for outsourcing services like credit information, black-listing/delisting, electronic cards,

mortgage valuation, insurance premium and others, if any. In addition, BFIs mush not

charge any fee for reactivating dormant account and must credit the interest on the

dormant account regardless of cause for dormancy. Similarly, they cannot levy a fee from

any account-holder for his inability to maintain minimum balance.

Pre-payment charge: BFIs are required to make clear provision about pre-payment

charges in their credit policy and must pre-inform clients about such provision. However,

if a client opts to pay the loan from his own income BFIs cannot charge pre-payment fee

on such payment.

Grievance hearing: BFIs must open a desk for grievance hearing and inform about it

publicly. Similarly, they must assign a hot line and an officer to hear customer grievances.

Financial literacy: BFIs must provide all information regarding any services in plain and

understandable language. Similarly, they have to assist in enhancing financial literacy

through providing information of financial services and develop advertisements and

educational materials in this effect.

Privacy and data protection: BFIs must have sufficient arrangements for information

privacy and unofficial access to records, account statements and other personal

information of customers.


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6.33 Since the financial crisis has not dented Nepalese financial system

significantly, it did hinder its smooth operation. However, as a lesson

learning from the crisis, the governments of Nepal and central bank have

been collectively working on consumer financial protection and financial

literacy in order to minimize financial risks and bolster consumer

confidence in the financial institutions. The government has made a

mandatory provision, which is already in practice, for insurance for deposits

up to NRs. 200,000 in NRB regulated financial institutions. Similarly, NRB

has forwarded a consultative circular in the website regarding consumer

financial protection and financial literacy. NRB aims to put forth it for

implementation after consultation with stakeholders.

Financial Literacy

6.34 NRB is formally affiliated to Alliance for Financial Inclusion (AFI) and

Child and Youth Finance International (CYFI), which are working as

international forums with regard to financial inclusion and financial literacy,

respectively. As a member of AFI, NRB has made some commitments

regarding financial inclusion under 'The Maya Declaration' in 2013.

6.35 NRB has involved in different activities to promote financial literacy in the

country through various financial literacy-centric programs. It has been

developing financial literacy materials (booklets, CDs) and disseminating to

general public.

6.36 NRB celebrated the global financial literacy week called 'Global Money

Week' announced by the CYFI in March 2013 and March 2014. In this

concern, NRB organized intensive interaction programs both the year

regarding financial literacy specially focused on school students. During the

interaction program in March 2014, NRB also released a musical CD

comprising 6 financial literacy songs and a hand-book entitled 'NRB with

Students' as a reference material for basic financial literacy. Moreover, a

financial literacy rally was also organized in Kathmandu on March 15th

gathering more than 1000 people comprising students, bank employees and

financial institutions and other stakeholders. A special program, entitled

'NRB with Students Program' has been launched by the NRB in different

schools, on a regular basis, as a financial literacy campaign among the


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youths. Chaired by NRB Governor, NRB organized this program in two

different schools during 2013/14 where a short presentation was given and

the relevant materials were distributed to the students.

6.37 Licensed banks and financial institutions also carried out different financial

literacy activities during the week. NRB is also working closely with

Ministry of Education to incorporate the issue of financial literacy in formal

educational curriculum. A separate window has been put-in place within

NRB web-site entitled 'financial literacy'. NRB is working for framing a

new National Financial Literacy Strategy.

Financial Legislative Reform

6.38 NRB is in process for second amendment of the NRB Act 2002. NRB Board

has approved the proposed amendment draft of NRB Act and sent to

Government for necessary enactment. Likewise, the second amendment of

Bank and Financial institution Act, 2006 and Banking Offence Act has also

been submitted to GoN for necessary enactment.

Provision forHire Purchase Companies

6.39 NRB has issued the Hire Purchase Company Approval Procedure 2014,

henceforth hire-purchase companies can provide loans to consumers to

purchase automobiles and repay the loan in installments after obtaining

license from NRB. Before that policy, NRB had placed ban on such hire-

purchase loans being provided by dealers. NRB had allowed dealers of two-

wheelers, cars, electronic appliances and gadgets to provide hire-purchase

loans to buyers directly by establishing their own hire-purchase

company. According to the regulation, a hire-purchase company needs to

have paid up capital minimum of Rs 100 million and has to maintain net

worth of Rs 100 million. In addition, the company can only lend up to 10

times the net worth. By getting licensed by NRB, the hire-purchase

companies will fall under the regulatory ambit of the central bank. Hire

purchase loans made up Rs 63 billion — approximately 5.6 per cent — of

the total loans floated by BFIs as on mid-July 2014. Hire purchase

companies have to provide NRB the details regarding their hire-purchase

deals on a half-yearly basis — in mid-July and mid-January of each fiscal

year. Likewise, the company has to publish their audited balance sheet


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prepared in prescribed format of Company Act 2063 after the end of each

fiscal year. These companies are not allowed to collect deposits.

Payment and Settlement Reforms

6.40 NRB has issued Directives (directive no.21 of Unified Directive 2014) to

BFIs for providing electronic banking services but it has not comprehensive

laws regarding the Payment and Settlement System (PSS). But some other

laws such as Electronic Transactions Act, Securities Act, Negotiable

instrument Act; Public Debt Act, etc. are in place to support PSS. NRB in its

National Payment System Development Strategy‘s Pillar I, it has stated

sound and robust legal environment in regard to PSS in the country. NRB in

its action plan has stated to introduce comprehensive law which will cover

the NPS and will issue general regulations and guidelines on this regard.

6.41 NRB has set up the Payment and Settlements Unit under Banks and

Financial Institutions Regulation Department which has the responsibility

for development of Payment and Settlement Systems (PSS). The recently

formed unit is drawing initiatives on PSS. It is also responsible for oversight

functions, forming laws, bylaws and general regulations related to PSS,

formulate and implement the strategies.

6.42 NRB is in process to procure and implement RTGS which will help for

settling large value interbank transfers, bulk payment clearing operations,

securities transactions, etc. To develop retail payment system in the country

NRB will form and lead retail Payments Working Group with membership

drawn from all parties involved in retail payment system and this group will

develop a strategy and action plan in this regard. Existing infrastructure

regarding PSS are as follows:-

High value customer payments are made by cherub; any cheques for

more than NPR 100 million are considered as high value and are entered

into a special daily manual clearing session at NRB.

NRB has procured General Ledger (GL) system which provides for

funds transfers between accounts; government securities public debt

management; treasury operations and an internet banking facility for

commercial bank.


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The interbank clearing system (retail level) operated by Nepal Clearing

House (NCH). NCH currently operates a cheque truncation and clearing

service in the Kathmandu valley.

The debit card switching and clearing systems operated by SCT and

others. Himalayan Bank (commercial bank of the country) acts as the

settlement bank for SCT. Other than SCT, Nepal Investment Bank

Limited and Nepal Electronic Payment Services (NEPS) has a

connection to number of banks which manage card and card

transactions.

NEPSE operates Automated Trading System in Kathmandu valley and

in other five major cities of the country.

CDS and Clearing Limited (CDSC) has been set up for Central

Securities Depository CSD) system which will perform all clearing and

settlement services for securities.

6.43 We can see tremendous development in medium of payment in the country.

Recent developments in cash and non-cash payment are stated as follows,

almost of which are interoperable between BFIs, customers, and merchant

and other payment processors:

Banks are taking various initiatives for retail electronic payments in the

spheres of internet/ mobile banking, cross-border inward remittances

and cards. The initiatives pertain to creation of networks of clusters of

banks for card-based payment services (ATM and EFTPOS through

SCT and two other providers), different product offerings in mobile

banking (e.g. Hello Paisa) and remittance products.

Mobile payment services have started to be offered through agreements

between mobile network operators and BFIs. Some of the popular and

innovative mobile payments services are MNepal, E-sewa, Fonepay etc.

NRB has issued directives to BFIs to issue MICR encoded cheques.

SWIFT are used for all interbank payments.

POS and POT machines are also gaining popularity in the medium of

payment.


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Monetary Policy

6.44 The monetary policy for 2014/15 is directed towards restraining pressure on

prices and external sector stability from demand side and supporting

economic growth by promoting credit to the productive sector on supply

side. Taking into account the situation of long standing excess liquidity in

the banking system and its likely adverse impact on inflation, external sector

and financial stability, the stance of monetary policy 2014/15 has been made

slightly tight. However, the provisions have been made to supply adequate

credit from the banking system to achieve targeted economic growth for

2014/15.

6.45 The monetary policy is also geared towards maintaining overall financial

stability by strengthening BFIs, which serve as a medium of transmission

for monetary policy. In addition, promoting access to finance is also an

integral part of the monetary policy.

6.46 The monetary policy for 2014/15 has set the target of containing annual

average CPI inflation at 8.0 percent and maintaining foreign exchange

reserves sufficient to cover the import of goods and services for at least 8

months. In addition, the monetary policy has also made an arrangement for

providing adequate credit to support the economic growth of 6 percent as

mentioned in the budget for 2014/15.

6.47 In line with the stance of monetary policy for containing demand-side

inflation and supporting targeted economic growth; the growth rate of broad

money, which is an intermediate target of monetary policy, is projected to

remain at 16 percent in 2014/15. Considering the aggregate demand

situation based on the projected economic growth and inflation for 2014/15,

the growth rate of private sector credit is projected to be 18 percent.

6.48 In order to tighten the monetary policy slightly by managing the excess

liquidity situation generated from the significant remittance inflows, policies

and programs such as increasing the cash reserve ratio (CRR) for banks,

allowing banks to invest certain portion of their foreign exchange reserves

abroad, making OMOs more proactive, and issuance of additional financial

instruments like time deposit auction for OMOs have been adopted for this


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fiscal year. In order to manage liquidity in the economy, CRR to be

maintained by BFIs has been increased and fixed at 6 percent for "A" class,

5 percent for "B" class and 4 percent for "C" class financial institutions.

6.49 Necessary arrangement will be made to ensure the availability of credit at 6

percent interest rate from commercial banks for livestock, herbs,

horticulture, dairy, fishery, mushroom farming, agriculture storage, animal

slaughterhouse and meat related businesses, as mentioned in the

Government Budget statement of 2014/15. In case of resources needed for

such credit flows, refinance will be made available from NRB.

6.50 To make OMO, a principal instrument of monetary policy, effective and in

order to conduct it transparently, "Nepal Rastra Bank Open Market

Operations By-laws" has been brought into implementation. New provisions

of the by-laws such as (1) regular (2) fine tuning (3) structural OMOs will

be implemented as necessary.

6.51 To consolidate the financial system, along with the merger process among

the BFIs, acquisition activities will also be encouraged as per the provision

of Acquisition Bylaws, 2070.

6.52 The time limit of mid-July 2014 was given for ―A‖, ―B‖ and ―C‖ class

institutions to meet minimum paid-up capital. For those BFIs not fulfilling

the requirement of paid-up capital within the given time period, restrictions

have been placed on branch expansion and distribution of cash dividend,

and cap have been imposed on deposit collection and loan flows.


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Annex 1

Structure of the Nepalese Financial Sector

(Total Assets/Liabilities)

(Mid-July 2010- 2014)

(Rs. in millions)

Financial Institutions 2010 2011 2012 2013 2014

Nepal Rastra Bank 296,625.6 319,692.6 455,826.5 534,897.9 655280.6

Commercial Banks 763,226.3 853,490.7 1,052,450.7 1,242,881.4 1467151.9

Development Banks 102,208.9 129,617.4 160,360.2 199,954.8 255373.4

Microfinance Development

Banks 17,681.6 20,862.9 29,815.5 35,774.9 49395.8

Finance Companies 109,998.2 118,578.2 109,687.5 100,856.7 105,592.6

Financial Co-operatives 6,975.2 8,150.6 11,652.4 15,415.1 21030

Financial NGOS 2,382.6 4,937.6 4,260.0 5,560.0 5120


Employees Provident Fund 90,390.3 106,584.5 125,752.8 145,283.4 170638.6

Citizen Investment Trust 22,647.8 26,905.4 38,068.5 42,753.6 54621.3

Insurance Companies 47,460.0 61,213.4 73,825.0 84,650.4 101097.2

Postal Savings Bank 1,085.9 1,152.4 1,276.4 1,397.2 1580

Total 1,460,682.4 1,651,185.7 2,062,975.5 2,409,425.3 2,886,881.4

Market capitalization 376,871.0 323,484.3 368,262.1 514,492.1 1,057,165.8

Total (incl. market

capitalization) 1,837,553.4 1,974,670.0 2,431,237.6 2,923,917.5 3,944,047.2

Percentage Share

Financial Institutions

Nepal Rastra Bank 20.3 19.4 22.1 22.2 22.69

Commercial Banks 52.3 51.7 51.0 51.6 50.82

Development Banks 7.0 7.8 7.8 8.3 8.85

Microfinance Development

Banks 1.2 1.3 1.4 1.5 1.71

Finance Companies 7.5 7.2 5.3 4.2 3.65

Financial Co-operatives 0.5 0.5 0.6 0.6 0.73

Financial NGOS 0.2 0.3 0.2 0.2 0.17


Employees Provident Fund 6.2 6.5 6.1 6.0 5.91

Citizen Investment Trust 1.6 1.6 1.8 1.8 1.89

Insurance Companies 3.2 3.7 3.6 3.5 3.5

Postal Savings Bank 0.1 0.1 0.1 0.1 0.05

Total 100.0 100.0 100.0 100.00 100.00

Annexes

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Annex 2

Aggregate Statement of Assets and Liabilities of BFIs

(2011- 2014)

(Rs. in millions)

Particulars Mid-July Mid-Jan

2012 2013 2014 2012 2013 2014

LIABILITIES

1 CAPITAL FUND 115163.0 131724.3 145861.4 108783.3 127300.4 145113.1

a. Paid-up Capital 104303.8 119506.9 128985.3 101424.5 111730.9 124463.3

b. Statutory Reserves 22068.1 26038.2 32722.1 21139.0 25321.3 32058.8

c. Retained Earning -24321.8 -22344.2 -27214.2 -26766.3 -21367.2 -21052.2

d. Others Reserves 13112.8 8523.4 11368.3 12986.1 11615.4 9643.2

2 BORROWINGS 17805.9 26999.3 18202.8 20353.3 21426.3 24171.0

a. NRB 4286.7 2884.3 2010.0 4355.6 711.8 1966.7

b. "A‖ Class Licensed

Institution 3297.0 10466.6 5182.0 5788.5 10179.9 7312.0

c. Foreign Banks and

Fin. Ins. 2507.9 2954.3 4.1 2478.8 2189.7 3091.9

d. Other Financial Ins. 781.1 2438.3 1306.5 1630.7 1611.5 2550.3

e. Bonds and Securities 6933.2 8255.9 9700.1 6099.6 6733.4 9250.1

3 DEPOSITS 1071394.1 1250062.0 1477832.6 952724.0 1125005.9 1353132.4

a. Current 95993.1 111686.5 129108.4 75164.2 89231.5 114801.1

b. Savings 400723.1 471215.4 587593.5 344091.5 449158.9 536159.4

c. Fixed 372137.6 423478.4 453408.6 363408.6 378134.3 438015.8

d. Call Deposits 187998.5 225704.8 285024.3 157072.6 192754.3 243072.2

e. Others 14541.8 17976.8 22697.8 12987.2 15726.9 21083.9

4 Bills Payable 1626.4 1561.6 1553.1 783.8 2005.6 1520.4

5 Other Liabilities 123660.2 140770.3 169227.4 125326.6 141312.7 171911.2

1. Loan Loss Provision 33874.0 42223.8 48932.5 38128.4 38742.3 47445.7

2. Interest Suspense a/c 26056.2 27920.7 30453.8 31569.1 28951.8 32143.5

3. Others 63730.1 70625.8 89841.2 55629.1 73618.6 92322.0

6 Reconciliation A/c 1537.8 7290.0 2869.5 3131.6 9043.9 4265.5

7 Profit & Loss A/c 19776.5 26544.7 31566.8 7189.0 11013.8 13088.5

TOTAL LIABILITIES 1350963.9 1584952.3 1847113.7 1218291.5 1437108.6 1713202.0

ASSETS

1 LIQUID FUNDS 236056.9 259224.9 319196.6 193635.3 194724.4 267705.3

a. Cash Balance 31020.1 35728.2 41862.1 23637.8 27712.4 34888.1

Nepalese Notes &

Coins 30353.3 34876.1 41073.7 22819.7 26861.4 34086.3

Foreign Currency 666.8 852.1 788.3 818.1 851.0 801.8

b. Bank Balance 164605.2 173856.7 220546.6 139621.1 121372.2 181920.5

1. In Nepal Rastra 120457.3 130802.8 162286.9 95445.3 70321.9 118386.6


112 | P a g e


2012 2013 2014 2012 2013 2014 Bank

2. "A‖ Class Licensed

Institution 26284.3 23269.1 34656.5 17703.2 23658.7 28776.0

3. Other Financial Ins. 7649.8 5673.4 5302.9 9154.6 6264.2 5906.6

4. In Foreign banks 10213.8 14111.4 18300.39 17317.9 21127.4 28851.3

c. Money at Call 40431.6 49640.1 56788.0 30376.4 45639.8 50896.7

2 INVESTMENTS 137304.4 151340.0 162544.9 125857.2 144665.8 166689.9

a. Govt. Securities 133251.1 149700.8 160867.1 124784.1 143841.9 165005.0

b Others 4053.3 1639.2 1677.78 1073.1 823.9 1685.0

3 SHARE & OTHER

INVESTMENT 52851.1 66725.5 72656.2 47680.1 60521.4 73234.3

4 LOANS &

ADVANCES 779560.9 945698.4 1119260.8 728369.9 879892.4 1028038.9

a. Private Sector 741145.0 915010.0 1084965.3 703247.3 850740.8 999705.0

b. Financial Institutions 31389.3 21910.2 26247.7 18251.1 20120.8 22108.7

c. Government

Organizations 7026.6 8778.2 8047.8 6871.5 9030.8 6225.1

5 BILL PURCHED 9634.2 9007.9 9805.6 7192.2 6938.8 9484.9

6 LOANS AGT.

COLLECTED BILLS 645.9 1015.5 737.3 416.2 453.7 1498.8

7 FIXED ASSETS 27146.4 28916.8 30477.7 26009.4 28914.1 29852.1

8 OTHER ASSETS 93318.3 104448.2 123962.3 92102.0 104736.7 120557.4

a. Accrued Interests 27621.8 30638.6 32041.3 33471.8 30666.7 34869.6

b. Others 65696.6 73809.6 91921.0 58630.1 74070.0 85687.7

9 Expenses not Written

off 586.9 622.0 492.0 551.9 849.6 594.1

10 Non-Banking Assets 2225.1 3731.3 4757.0 2322.8 2566.4 4099.7

11 Reconciliation

Account 8638.9 10394.1 -1032.5 -9788.7 9518.2 9262.1

12 Profit & Loss A/c 2994.9 3827.7 4255.8 3943.3 3327.1 2184.4

TOTAL ASSETS 1350963.9 1584952.3 1847113.7 1218291.9 1437108.6 1713202.0

Annexes

P a g e | 113

Annex 3

Statement of Assets and Liabilities of BFIs

(Mid-July 2014)

(Rs. in millions)

Particulars Class 'A' Class 'B' Class 'C' Total

LIABILITIES

1 CAPITAL FUND 108212.9 27683.6 9964.9 145861.4

a. Paid-up Capital 87454.0 25606.5 15924.7 128985.3

b. Statutory Reserves 27696.2 2706.2 2319.7 32722.1

c. Retained Earning -16561.9 -1481.5 -9170.8 -27214.2

d. Others Reserves 9624.6 852.4 891.4 11368.3

2 BORROWINGS 15228.2 2408.5 566.2 18202.8

a. NRB 2010.0 0.0 0.0 2010.0

b. "A" Class Licensed Institution 2601.5 2014.4 566.2 5182.0

c. Foreign Banks and Fin. Ins. 4.1 0.0 0.0 4.1

d. Other Financial Ins. 912.4 394.1 0.0 1306.5

e. Bonds and Securities 9700.1 0.0 0.0 9700.1

3 DEPOSITS 1204463.4 199932.8 73436.4 1477832.6

a. Current 125065.8 3964.2 78.4 129108.4

b. Savings 450525.0 105094.4 31974.1 587593.5

c. Fixed 365048.5 53998.4 34361.7 453408.6

d. Call Deposits 247429.6 36345.5 1249.1 285024.3

e. Others 16394.5 530.2 5773.1 22697.8

4 Bills Payable 1513.8 32.7 6.6 1553.1

5 Other Liabilities 127781.3 20116.9 21329.3 169227.4

1. Loan Loss Provision 31622.9 6860.1 10449.5 48932.5

2. Interest Suspense a/c 21397.7 3118.0 5938.1 30453.8

3. Others 74760.7 10138.8 4941.8 89841.2

6 Reconciliation A/c -2495.7 3671.6 1693.5 2869.5

7 Profit & Loss A/c 23141.7 5079.6 3345.5 31566.8

TOTAL LIABILITIES 1477845.6 258925.7 110342.4 1847113.7

ASSETS

1 LIQUID FUNDS 226401.8 68931.3 23863.5 319196.6

a. Cash Balance 34628.5 6139.8 1093.7 41862.1

Nepalese Notes & Coins 33928.6 6051.7 1093.4 41073.7

Foreign Currency 699.9 88.1 0.4 788.4


114 | P a g e

Particulars Class 'A' Class 'B' Class 'C' Total

b. Bank Balance 177300.6 27923.3 15322.6 220546.6

1. In Nepal Rastra Bank 149910.9 9163.6 3212.4 162286.9

2. "A "Class Licensed Institution 9153.1 15810.3 9693.1 34656.5

3. Other Financial Ins. 18.8 2866.9 2417.2 5302.9

4. In Foreign banks 18217.8 82.5 0.0 18300.3

c. Money at Call 14472.7 34868.1 7447.2 56788.0

2 INVESTMENTS 156830.5 3230.1 2484.2 162544.9

a. Government Securities 155190.3 3230.0 2446.8 160867.1

b Others 1640.2 0.1 37.4 1677.8

3 SHARE & OTHER

INVESTMENT 69534.8 1565.0 1556.5 72656.2

4 LOANS & ADVANCES 891629.9 161799.2 65831.7 1119260.8

a. Private Sector 860588.4 160516.9 63860.1 1084965.3

b. Financial Institutions 23050.8 1246.5 1950.4 26247.7

c. Government Organizations 7990.8 35.8 21.2 8047.8

5 BILLS PURCHASED 9794.9 4.3 6.4 9805.6

6 LOANS AGT. COLLECTED

BILLS 737.2 0.0 0.0 737.2

7 FIXED ASSETS 22600.0 5259.4 2618.3 30477.7

8 OTHER ASSETS 102400.9 11379.6 10181.8 123962.3

a. Accrued Interests 22763.5 3316.4 5961.4 32041.3

b. Others 79637.4 8063.2 4220.3 91921.0

9 Expenses not Written off 398.4 43.4 50.2 492.0

10 Non-Banking Assets 2046.8 1539.6 1170.5 4757.0

11 Reconciliation Account -6377.2 3645.3 1699.4 -1032.5

12 Profit & Loss A/c 1847.5 1528.4 879.8 4255.8

TOTAL ASSETS 1477845.6 258925.7 110342.4 1847113.7

Annexes

P a g e | 115

Annex 4

Major Financial Indicators of MFFIs

('D' Class Financial Institutions)

(Rs. in millions)


Liabilities 2012 2013 2014 2012 2013 2014

1 CAPITAL FUND 2816.6 3801.33 4950.7 2231.0 3318.3 4749.6

2 BORROWINGS 16586.4 20216.25 27897.3 10635.7 17521.4 23480.7

3 DEPOSITS 5235.2 7221.62 11001.2 2676.9 5963.3 9140.5

4 Bills Payable

1.8

5 Other Liabilities 2502.9 3009.70 3777.5 1196.5 2834.1 3472.7

6 Reconciliation A/c 2236.6 688.57 1088.2 2034.4 1675.1 831.7

7 Profit & Loss A/c 629.8 837.88 1473.7 261.1 414.1 662.1

Total Liabilities 30007.5 35775.3 50188.7 19035.5 31726.2 42339.0

Assets

1 LIQUID FUNDS 5843.5 6322.82 7202.8 3449.1 5737.4 7443.2

2

INVESTMENT IN

SECURITIES

EXCEPT SHARES

128.7 116.17 116.2 51.2 128.7 116.2

3 SHARE & OTHER

INVESTMENT 2040.6 2963.62 2894.2 1424.8 2816.5 3154.5

4 LOANS &

ADVANCES 17738.3 23401.73 35689.3 11033.7 19402.1 28211.9

5 FIXED ASSETS 340.2 444.56 624.4 243.7 380.5 574.1

6 OTHER ASSETS 1594.9 1685.83 2485.4 643.6 1541.6 1929.6

7 Expenses not

Written off 0.7 9.83 9.4 143.6 10.6 11.1

8 Non-Banking

Assets

0.7

9 Reconciliation

Account 2234.8 699.60 1085.2 2029.2 0.0 797.5

10 Profit & Loss A/c 85.8 131.22 81.8 15.8 1611.0 100.2

Total Assets 30007.5 35775.4 50188.7 19036 31726.2 42339.0


116 | P a g e

Annex 5

Sector wise, Product wise and

Security wise Credit flow from BFIs

(Mid-July 2014)

(Rs. in millions)

Sector Wise Class

"A"

Class

"B"

Class

"C" Total

1 Agricultural and Forest

Related 37810.81 8423.26 1918.01 48152.08

2 Fishery Related 2491.48 214.77 40.81 2747.06

3 Mining Related 3258.97 275.24 45.84 3580.05

4 Manufacturing (Producing)

Related 207142.86 10699.48 4647.36 222489.70

5 Construction 88914.98 19507.92 10209.97 118632.87

6 Electricity, Gas and Water 21784.34 3617.75 204.52 25606.61

7 Metal Products, Mach. & Ele.

Eqp. 10887.77 2385.15 722.06 13994.97

8 Trans., Com. and Public

Utilities 25221.64 12897.59 5588.33 43707.55

9 Wholesaler & Retailer 205667.15 29633.88 8665.13 243966.15

10 Finance, Insurance and Real

Estate 72768.84 12797.65 4787.27 90353.77

11 Hotel or Restaurant 24846.43 6278.73 1784.46 32909.63

12 Other Services 43987.36 7909.36 2257.51 54154.23

13 Consumption Loans 68227.23 12728.61 6047.38 87003.21

14 Local Government 1096.16 38.04 48.53 1182.73

15 Others 88042.57 34396.15 18870.91 141309.64

Total sector wise Loan 902162.01 161803.56 65838.09 1129803.67

Product Wise

1 Term Loan 142965.53 21437.34 8666.94 173069.81

2 Overdraft 170872.66 40494.92 0.00 211367.58

3 Trust Receipt Loan / Import

Loan 48161.32 0.00 0.00 48161.32

4 Demand & Other Working

Capital Loan 216015.90 19857.01 14734.55 250607.47

Annexes

P a g e | 117

Sector Wise Class

"A"

Class

"B"

Class

"C" Total

5 Res. Per. H. Loan (Up to Rs. 10

mil.) 64673.30 16820.26 7991.30 89484.87

6 Real Estate Loan 60467.66 12773.90 9240.60 82482.16

7 Margin Nature Loan 11988.14 4112.98 3930.51 20031.63

8 Hire Purchase Loan 41023.45 15906.14 6724.31 63653.90

9 Deprived Sector Loan 40962.32 7564.63 2049.60 50576.56

1

0 Bills Purchased 10034.34 4.34 6.40 10045.08

1

1 Other Product 94997.38 22832.03 12493.87 130323.28

Total Product wise Loan 902162.00 161803.56 65838.09 1129803.66

Collateral Wise

1 Gold and Silver 27088.37 3680.33 333.97 31102.67

2 Government Securities 968.71 5.85 17.56 992.12

3 Non Governmental Securities 8973.82 3181.68 1936.64 14092.14

4 Fixed Deposit Receipts 7359.78 1709.14 1705.66 10774.58

Own 6478.67 1709.14 1705.66 9893.47

Other Licenses Institutions 881.11 0.00 0.00 881.11

5 Collateral of Properties 733614.96 147209.51 55586.29 936410.77

Fixed Assets 583662.27 146794.10 55348.44 785804.82

Current Assets 149952.69 415.41 237.85 150605.95

6 Against security of Bill 11923.28 4.20 0.00 11927.48

Domestic Bills 2813.31 4.20 0.00 2817.51

Foreign Bills 9109.97 0.00 0.00 9109.97

7 Against Guarantee 25697.50 3621.07 656.57 29975.14

Government Guarantee 1975.30 112.75 67.90 2155.95

Institutional Guarantee 18972.97 1492.52 272.12 20737.62

Personal Guarantee 1684.14 200.91 116.64 2001.69

Collective Guarantee 404.05 1737.70 25.91 2167.66

Int. Rtd. Foreign Bank's

Guarantee 117.47 74.78 0.00 192.25

Other Guarantee 2529.85 2.41 174.00 2706.26

8 Credit Card 410.98 0.00 0.00 410.98

9 Others 86124.60 2391.77 5601.40 94117.78

Total Collateral wise Loan 902162.02 161803.56 65838.09 1129803.67


118 | P a g e

Annex 6

Profit & Loss Account of BFIs (Aggregate)

(As of Mid-July 2014)

Expenses Class "A" Class "B" Class "C" Total

1 Interest Expenses 49263.5 13000.6 5887.2 68151.4

1.1 Deposit Liabilities 47872.1 12811.1 5802.4 66485.6

1.1.1 Saving A/c 13593.2 5944.4 2225.5 21763.1

1.1.2 Fixed A/c 26009.7 5071.1 3502.4 34583.2

1.1.2.1 Up to 3 Months Fixed A/c 2734.9 93.8 37.7 2866.4

1.1.2.2 3 to 6 Months fixed A/c 861.8 146.2 57.3 1065.3

1.1.2.3 6 Months to 1 Year Fixed A/c 10816.7 2573.5 1746.1 15136.3

1.1.2.4 Above 1 Year 11596.4 2257.5 1661.3 15515.2

1.1.3 Call Deposit 8238.6 1795.6 74.5 10108.6

1.1.4 Certificate of Deposits 30.6 0.0 0.0 30.6

1.2 Others 1391.4 189.4 84.9 1665.7

2 Commission/Fee Expense 441.6 5.4 1.0 448.0

3 Employees Expenses 15561.9 2356.6 829.3 18747.8

4 Office Operating Expenses 11195.2 2905.9 966.7 15067.8

5 Exchange Fluctuation Loss 23.7 7.2 0.0 31.0

5.1 Due to Change in Exchange Rates 12.2 4.0 0.0 16.2

5.2 Due to Foreign Currency Transactions 11.5 3.3 0.0 14.8

6 Non-Operating Expenses 15.6 110.8 17.4 143.9

7. Provision for Risk 8339.4 3525.1 2410.4 14274.8

7.1 Loan loss Provision 8091.4 2554.9 1716.1 12362.4

7.1.1 General Loan loss Provision 2084.1 563.5 187.8 2835.4

7.1.2 Special Loan Loss Provision 6007.3 1934.6 1482.5 9424.4

7.1.3 Additional Loan Loss Provision 0.0 56.8 45.8 102.5

7.2. Provision for Non-Banking Assets 208.0 642.0 648.3 1498.3

7.3. Provision for Loss on Investment -1.1 2.8 38.5 40.1

7.4. Provision for Loss of Other Assets 41.1 325.4 7.6 374.1

8 Loan Written Off 269.9 165.5 188.1 623.5

9 Provision for Staff Bonus 2660.3 569.2 222.6 3452.1

Annexes

P a g e | 119

Expenses Class "A" Class "B" Class "C" Total

10 Provision for Income Tax 8232.6 1810.1 635.0 10677.7

11 Others 6.1 36.8 2.1 45.1

12 Net Profit 21294.2 4691.9 3345.5 29331.6

TOTAL EXPENSES 117304.2 29185.3 14505.3 160994.8

Income Class "A" Class "B" Class "C" Total

1. Interest Income 95849.23 22130.34 9212.31 127191.89

1.1. On Loans and Advance 91023.28 20111.26 8350.25 119484.79

1.2. On Investment 3239.70 152.46 110.82 3502.98

1.2.1 Government Bonds 2816.91 137.26 95.26 3049.44

1.2.2 Foreign Bonds 28.74 0.00 0.00 28.74

1.2.3 NRB Bonds 218.55 6.77 8.72 234.04

1.2.4 Debenture & Bonds 175.50 8.42 6.84 190.76

1.3 Agency Balance 714.00 168.42 79.67 962.10

1.4 On Call Deposit 258.09 1401.86 448.70 2108.65

1.5 Others 614.16 296.34 222.87 1133.37

2. Commission & Discount 7252.50 616.60 182.33 8051.43

2.1 Bills Purchase & Discount 231.59 0.20 0.00 231.79524024

2.2 Commission 6022.89 401.50 93.18 6517.57

2.3 Others 998.02 214.90 89.15 1302.07

3 Income From Exchange Fluctuation 4118.09 50.60 0.00 4168.69

3.1 Due to Change in Exchange Rate 219.24 0.94 0.00 220.18

3.2 Due to Foreign Currency Trans. 3898.85 49.67 0.00 3948.52

4 Other Operating Income 3614.09 1372.85 521.75 5508.69

5 Non Operating Income 1241.27 2135.56 664.61 4041.44

6 Provision Written Back 4031.87 1658.69 2989.11 8679.68

7 Recovery from Written off Loan 776.54 10.34 19.14 806.02

8 Income from Extra Ordinary Expenses 420.58 69.49 36.25 526.32

9 Net Loss 0.00 1140.79 879.82 2020.61

TOTAL INCOME 117304.17 29185.27 14505.33 160994.77


120 | P a g e

Annex 7

Financial Soundness Indicators (FSIs) of A, B and C Class

Institutions

(Mid-July, 2014)

(In percent)

'A'

Class

'B'

Class

'C'

Class Total

Capital Adequacy Ratios

Regulatory capital to risk-weighted assets 12.03 15.61 15.92 12.74

Regulatory Tier - 1 capital to risk-

weighted assets 10.39 14.80 15.17 11.27

Non- performing loan to total gross loan 2.92 4.16 14.33 3.76

Non- performing loan net of provisions to

capital 4.49 4.62 5.63 4.59

Sectoral Distribution of Loans to Total Gross Loan

Agricultural and Forest Related 4.19 5.21 2.91 4.26

Fishery Related 0.28 0.13 0.06 0.24

Mining Related 0.36 0.17 0.07 0.32

Agricultural, Forestry and beverage

Production Related 22.96 6.61 7.06 19.69

Non food Production Related

Construction 9.86 12.06 15.51 10.50

Electricity, Gas and Water 2.41 2.24 0.31 2.27

Metal Products, Machinery & Electronic

Equipments & Assemblage 1.21 1.47 1.10 1.24

Annexes

P a g e | 121

'A'

Class

'B'

Class

'C'

Class Total

Transport, Communication and Public

Utilities 2.80 7.97 8.49 3.87

Wholesaler & Retailer 22.80 18.31 13.16 21.59

Finance, Insurance and Real Estate 8.07 7.91 7.27 8.00

Hotel or Restaurant 2.75 3.88 2.71 2.91

Other Services 4.88 4.89 3.43 4.79

Consumption Loans 7.56 7.87 9.19 7.70

Local Government 0.12 0.02 0.07 0.10

Others 9.76 21.26 28.66 12.51

100.00 100.00 100.00 100.00

Others

Returns on Assets 1.44 1.37 2.23 1.48

Returns on Equity 14.76 11.04 18.69 14.40

Interest Margin to Gross Income 74.17 68.62 70.84 73.06

Non Interest Expenses to Gross Income 43.37 40.76 38.70 42.67

Liquid Assets to total Assets 25.90 27.87 23.86 26.06

Liquid Assets to total Deposits 31.78 36.09 35.84 32.57

Credit to Deposit Ratio 74.90 80.93 89.65 76.45


122 | P a g e

Annex-8

Stress Testing Results for Commercial Banks

Criteria

Mid-

Jul

2011

Mid-

Jan

2012

Mid-

Jul

2012

Mid-

Jan

2013

Mid-

Jul

2013

Mid-

Jan

2014

Mid-

Jul

2014

No. of banks with CAR < 10%

A. Credit Shocks

15 percent of Performing loans

deteriorated to substandard, 15 Percent of

Substandard loans deteriorated to

doubtful loans, 25 Percent of Doubtful

loans deteriorated to loss loans. 5 Percent

of Performing loans deteriorated to loss

loans.

20 23 22 28 27 28 29

All NPLs under substandard category

downgraded to doubtful. All NPLs under

doubtful category downgraded to loss.

2 3 2 3 2 3 4

25 percent of performing loan of Real

Estate & Hosing sector loan directly

downgraded to substandard category of

NPLs.

4 6 2 3 2 3 4

25 percent of performing loan of Real

Estate & Hosing sector loan directly

downgraded to Loss category of NPLs.

16 16 8 13 5 9 9

Top 2 Large exposures downgraded:

Performing to Substandard 5 7 2 3 2 3 6

B. Liquidity Shocks

Withdrawal of customer deposits by 2%,

5%, 10%, 10% and 10% for five

consecutive days respectively.

15 12 5 19 5 16 10

Withdrawal of deposits by 5% 5 2 0 7 1 2 0



Withdrawal of deposits by top 2

institutional depositors. 16 12 9 17 10 11 8



Annexes

P a g e | 123

Criteria

Mid-

Jul

2011

Mid-

Jan

2012

Mid-

Jul

2012

Mid-

Jan

2013

Mid-

Jul

2013

Mid-

Jan

2014

Mid-

Jul

2014

No. of banks with CAR < 10%




individual depositors. 1 0 0 2 1 0 0






124 | P a g e

Annex 9

List of Merged Banks and Financial Institutions (as of mid-July, 2014)

S.N Merged and Merging BFIs Name of BFI (after merger)

Date of

operation

(after

merger)

1. Himchuli Bikash

Bank Ltd. (B

class)

Birgunj Finance Ltd.

(C class)

H&B Development Bank Ltd.

(B class, National Level)

6/15/2011

2. Business

Development

Bank Ltd. (B

class)

Universal Finance

Ltd. (C class)

Business Universal

Development Bank Ltd. (B

class, National Level)

4/3/2012

3. Kasthamandap

Development

Bank Ltd. (B

Class)

Shikhar Finance Ltd.

(C class)

Kasthamandap Development

Bank Ltd. (B Class, National

Level)

4/13/2012

4. Machhapuchhre

Bank Ltd.

Standard Finance Ltd.

(C class)

Machhapuchhre Bank Ltd. 7/9/2012

5. Global Bank Ltd. IME Financial

Institutions Ltd. (C

Class) and Lord

Buddha Finance

Ltd.(C class)

Global IME bank Ltd. 7/9/2012

6. Infrastructure

Development

Bank Ltd. (B

Class)

Swastik Finance Ltd.

(C class)

Infrastructure Development

Bank Ltd. (B class, National

Level)

7/10/2012

7. Annapurna

Development

Bank Ltd. (B

Class)

Suryadarshan Finance

Ltd. (C Class)

Supreme Development Bank

Ltd. (B class, National Level)

7/13/2012

8. Pashupati

Development

Bank Ltd. (B

class)

Uddhyam Bikash

Bank Ltd. (B Class)

Axis Development Bank Ltd.


7/13/2012

9. Vibor Bikash

Bank Ltd. (B

class)

Bhajuratna Finance

and Savings Company

Ltd. (C class)

Vibor Bikash Bank Ltd. (B


9/2/2012

Annexes

P a g e | 125


Date of

operation

(after

merger)

10. Butwal Finance

Ltd. (C class)

Alpic Everest Finance

Ltd. (C class) and

CMB Finance Ltd. (C

class)

Synergy Finance Ltd. (C class,

National level)

12/6/2012

11. Shine

Development

Bank Ltd. (B

class)

Resunga Bikash Bank

Ltd. (B class)

Shine Resunga Development

Bank Ltd. (B class, 10 District

Level)

3/17/2012

12. Prudential

Finance Coy.

Ltd. (C class)

Gorkha Finance Ltd.

(C class)

Prudential Finance Company

Ltd. (C class, National Level)

3/18/2013

13. Nepal Industrial

and Commercial

Bank Ltd.

Bank of Asia Ltd. NIC Asia Ltd. 6/30/2013

14. Diyalo Bikash

Bank Ltd. (B

class)

Professional Bikash

Bank Ltd. (B class)

Professional Diyalo Bikash

Bank (B class, 10 District

Level)

6/30/2013

15. Araniko

Development

Bank Ltd. (B

class)

Surya Development

Bank Ltd. (B class)

Araniko Development Bank

Ltd. (B class, 10 District

Level)

7/14/2013

16. Global IME Bank

Ltd (A class)

Social Development

Bank Ltd. (B class)

and Gulmi Bikash

Bank Ltd. (B class)

Global IME Bank Ltd (A

class)

7/14/2013

17. Prabhu Finance

Ltd. (C class)

Sambridhi Bikash

Bank Ltd. (B

class) and Baibhav

Finance Ltd. (C class)

Prabhu Bikash Bank Ltd. (B


7/14/2013

18. Royal Merchant

Banking and

Finance Ltd. (C

class)

Rara Bikash Bank

Ltd. (B class) and Api

Finance Ltd. (C class)

Apex Development Bank Ltd.


7/15/2013

19. Manakamana

Development

Bank Ltd. (B

class)

Yeti Finance Ltd. (C

class), Valley Finance

Ltd. (C Class)

Yeti Development Bank Ltd.


7/15/2013

20. Global IME Bank

Ltd (A class)

Commerz and Trust

Bank Ltd. (A class)

Global IME Bank Ltd (A

class)

3/30/2014


126 | P a g e


Date of

operation

(after

merger)

21. Reliable Finance

Ltd.(C class,

National level)

Shubhalaxmi Finance

Ltd. (C class, national

level), Nepal

Consumer

Development Bank

Ltd.(B class, 10

district level)

Reliable Development Bank

Ltd. (B class, national level)

4/16/2014

22. Reliance Finance

Ltd.(C class,

National level)

Lotus Investment

Finance Ltd. (C class,

National level)

Reliance Lotus Finance Ltd.

(C class, National level)

5/08/2014

23. Siddhartha

Finance Ltd. (C

class, National

level)

Imperial Finance Ltd.

(C class, National

level)

Siddhartha Finance Ltd. (C

class, National level)

5/02/2014

24. Civil Bank Ltd.

(A class)

Axis Development

Bank Ltd. (B class,

national level-after

merger of 10 district

level Pashupati Bikash

Bank Ltd., 3 district

level Udhyam

Development Bank

Ltd.), Civil Merchant

Finance Co. Ltd. (C

class, national level)

Civil Bank Ltd. (A class) 4/15/2014

25. Biratlaxmi

Development

Bank Ltd. (B

class, 3 district

level)

Khadbari

Development Bank

Ltd. (B class, 1 district

level)

Biratlaxmi Development Bank

Ltd.(B class, 10 district level)

5/17/2014

26. Sangrila

Development

Bank Ltd. (B

class, 10 district

level)

Bageshwori

Development Bank

Ltd. (B class, 1 district

level)

Bageshwori Development

Bank Ltd. (B class, national

level)

07/13/2014

27. Lumbini Bank

Ltd. (A class)

Nava Durga Finance

Company Ltd. (C

class, national level)

Lumbini Bank Ltd. (A class) 6/29/2014

Annexes

P a g e | 127

Annex 10

Composition of Financial Stability Oversight Committee

Members Committee Status

Mr. Gopal Prasad Kaphle, Deputy Governor Chairperson

Mr. Maha Prasad Adhikari, Deputy Governor Member

Mr. Manmohan Kumar Shrestha, Executive Director,

Bank and Financial Institutions Regulation Department Member

Mr. Hari Prasad Kaphle, Executive Director,

Development Bank Supervision Department Member

Dr. Min Bahadur Shrestha, Executive Director

Research Department Member

Mr. Narayan Prasad Paudel, Executive Director,

Finance Company Supervision Department Member

Dr. Binod Aatreya, Executive Director,

Micro Finance Promotion and Supervision Department Member

Mr. Bhishma Dhungana, Executive Director,

Foreign Exchange Management Department Member

Mr. Laxmi Prapanna Niraula, Executive Director,

Bank Supervision Department Member

Mr. Ramesh Kumar Pokharel, Director,

Bank and Financial Institutions Regulation Department Member Secretary

Registrar, Department of Cooperative Member (Invitee)

Chief Executive, Insurance Board Member (Invitee)

Chief Executive, Security Board of Nepal Member (Invitee)

Administrator, Employee Provident Fund Member (Invitee)

Chief Executive Officer, Citizen Investment Trust Member (Invitee)

Related Sectors Experts (maximum 2) Member (Invitee)


128 | P a g e

Annex 11

Composition of Financial Stability Sub-Committee

Committee Members Status

Mr. Ramesh Pokharel, Director,

Bank and Financial Institutions Regulation Department Coordinator

Mr. Narendra Singh Bista, Deputy Director,

Development Bank Supervision Department Member

Mr. Devendra Gautam, Deputy Director Member

Mr. Ram Hari Dahal, Deputy Director,

Micro Finance Promotion and Supervision Department Member

Mr. Bigyan Raj Subedi, Deputy Director,

Research Department Member

Mr. Nishchal Adhikari, Deputy Director,

Finance Company Supervision Department Member

Ms. Subash Aacharya, Deputy Director,

Foreign Exchange Management Department Member

Ms. Samjhana Dhakal, Deputy Director

Bank and Financial Institutions Regulation Department Member Secretary

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