KATHMANDU, June 20: The quality of banks’ assets has been declining and posing challenges to the stability of banks and financial institutions (BFIs).
Nepal Rastra Bank (NRB) publicized the ‘Financial Stability’ Report on Wednesday which mentions that the excessive interest rates on loans has led to a decrease in overall demand which is posing challenges to the business.
The NRB said that due to the excessive interest rates, the demand for loans has decreased which has led to a negative impact on banks. As a result, profit has decreased while non-performing loans have increased.
Mentioning that the BFIs are expanding due to merger and that they should remain alert to minimizing challenges, the NRB said that the flexible monetary policy introduced during COVID-19 needs to be taken back, which has affected the loan-paying capacity of borrowers.
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The report mentioned “Despite challenging circumstances, banks and financial institutions have managed to maintain sufficient capital, liquidity and profitability. The expanding role of the non-banking financial sector in the economy has made the financial system more complex and led to increased dependency and internal association.”
Currently, the exchange of financial resources among the BFIs, insurance companies, cooperatives, financial technology, Citizen Investment Trust, Social Security Fund, Employee Provident Fund (EPF) including other institutions has supported increased economic activities. The NRB has also taken an interest in this matter.
The report mentioned, “Such internal association has also created risks in new aspects of the financial system.”
The NRB mentioned that issues such as service deviation, poor governance practices and exaggerated credit without proper financial analysis have raised concerns about the safety of cooperative institutions.
It is stated in the conclusion of the report, “Political instability and economic slowdown could worsen these problems and impact on the financial system.”
The NRB emphasized the ongoing efforts to enhance financial inclusion and access, by focusing on priority areas, poor and small borrowers.
At the beginning of the report, Governor Maha Prasad Adhikari said that the flexibility demonstrated by the BFIs confirms the strength and resilience of the banking system.
Governor Adhikari said, “It can bear risks. In this context, vigilant, proactive and prudent banking regulations are crucial to sustain the goal of high economic growth by maintaining financial stability.”
