KATHMANDU, Dec 23: Nepal Rastra Bank (NRB) has restarted auditing loan portfolios of 10 large commercial banks, which could not be brought to conclusion previously.
Despatching a public notice, the NRB has invited Expression of Interest for Extensive Asset Quality Review (Loan Portfolio Review) of 10 commercial banks. The central bank has maintained a deadline of January 6, 2025 for the consulting firms to apply for the process.
Since the past few years, the International Monetary Fund (IMF) has been asking the NRB to conduct audits by international auditing firms of 10 large commercial banks operating in Nepal. Citing the suspicion about the quality of loans provided by the banks, the international monetary watchdog has sought the central bank to go into action.
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The IMF has been advancing this condition to approve its fourth installment amount to Nepal under Extended Credit Facility (ECF). During the COVID-19 pandemic, the IMF Executive Board approved a concessional loan of USD 398.8 million to Nepal under the ECF, scheduled over four years starting from mid-January 2022. Although the payments of up to the third installment have already been disbursed, the final installment of Rs 5.59 billion (approximately USD 42 million) is still pending.
According to an official of the NRB, the international level audit of the large 10 commercial banks is one of the clauses of the Article IV mission under the ECF. The IMF is expressing concern particularly about the quality of loans as a number of large commercial banks are suspected to have sanctioned loans to firms under lax regulatory measures.
“Bank asset quality in Nepal has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima,” the IMF said in the statement issued in February 2023.
According to the NRB, the non-performing loans (NPLs) ratio of banks reached as high as 3.8 percent in mid-July 2024, leading to a 29.5 percent increase in their loan-loss provisions. As of mid-October this year, banks’ NPL has further increased to 4.42 percent, while the NPLs of many banks have crossed five percent. Due to the increased bad debts, non-banking assets have piled up at banks which they are unable to sell in the market.
In these contexts, the IMF seems to make sure that the financial health of the major players of the financial sector of the economy, said the NRB source. “It is to assess whether the loans were given to the right borrowers and the quality of collateral will make banks recover their loan amounts.”
Earlier, the NRB had shortlisted five international auditing firms and had selected KPMG Assurance and Consulting Services, India, for this purpose. However, the central bank annulled the process after the Indian consultant failed in getting approval on its financial proposal.
