KATHMANDU, March 4: The Nepal Rastra Bank (NRB) has shortlisted six consulting firms to assess the asset quality of major banks in Nepal, reaffirming its commitment to adhering to the guidelines of international watchdog organisations regarding the country’s financial health.
Issuing a public notice, NRB has stated that it has shortlisted six consulting firms for the extensive asset quality review of ten commercial banks of Nepal as per section 30(5) of the Public Procurement Act, 2063 and as per section 71 of Nepal Rastra Bank Procurement Bylaws 2071.
According to the information released by the NRB, Deloitte Partners of Sri Lanka and Howladar Yunus & Co of Bangladesh have been included in this list, while rest of the shortlisted firms are Indian companies – KPMG Assurance and Consulting Services LLP, MSKA & Associates, JV: Mehra-JKSS-SSBDI-JV and JV: SRBA & B.K Agrawal & Co.
International financial institutions, including the International Monetary Fund (IMF) and the World Bank, have raised concerns over the lending practices of Nepali banks, which is referred to as ‘loan evergreening’ in banking terms. This means that some banks may be covertly issuing new loans to borrowers struggling with repayments to cover their existing debts.
These institutions have expressed dissatisfaction with this approach, warning that if widespread, it could pose a significant risk to the stability of Nepal’s banking system.
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The Nepal Development Update issued by the World Bank in 2014 also pointed out that the real health of the Nepali financial sector remained unknown and that it needed to be properly examined.
The update also mentioned that there was no assessment to see how long the installments of loans of banks were overdue and whether old loans were being ‘evergreened’.
In its April 2020 press release following the Article IV consultation with member country Nepal, the IMF noted that while official data indicates a low level of bad loans in Nepali banks, concerns remain over the overall quality of lending.
The IMF also showed concern that the overdraft and working capital loans taken by some borrowers amounted to up to 40 percent of the total loans.
Article IV of the agreement with the member countries states that the IMF can study and supervise the economies and economic policies of those countries. This is called the ‘Article IV’ consultation.
During this consultation, the IMF had stated that while supervising some banks, it was found that they had engaged in ‘loan evergreening’ and some businessmen had paid interest using loans such as overdrafts and working capital.
The IMF team had held discussions with stakeholders in Nepal a few months ago.
The international organisation even put forth this condition while approving its fourth installment amount to
Nepal being provided under Extended Credit Facility (ECF) that involves a concessional loan of USD 398.8 million for the country. In this regard, the IMF team had held discussions with stakeholders in Nepal a few months ago. In the press release released immediately after the discussions, it was suspected that the quality of loans of banks had deteriorated due to high interest rates, but the capital adequacy ratio was above the threshold fixed by the regulator.
Banks are prohibited from distributing dividends if their bad loans exceed the prescribed limit, raising suspicions among donor agencies that such loans may be concealed. The IMF has also shown interest in assessing whether bank-issued loans are backed by adequate collateral.
