KATHMANDU: Nepal Rastra Bank (NRB) has warned of the deteriorating quality of the assets held by banks and financial institutions that pose serious threats to the stability of finance. According to the recent 'Financial Stability' Report prepared by NRB, excessive interest rates on loans have reduced overall loan demand, compelling BFIs to accept less qualitative assets to sustain their business operations.
The report has shown that the index for asset quality risk more than tripled to 0.94 in FY 2022/23 from 0.25 in FY 2020/21. The index of the overall risk to financial sector stability jumped to 0.69 in the last fiscal year from 0.40 four years ago. The higher the index values, the greater the risks to the financial stability of the country, elaborated an NRB official.
The NRB attributes this fall in loan demand to the high interest rates that dealt a severe blow to profitability besides raising the incidence of non-performing loans among the BFIs. The central bank also raises the point that the flexible monetary policy brought out as a relief measure during the COVID-19 pandemic has inadvertently affected the capacity of borrowers to repay loans.
Despite these challenges, it is recognized that BFIs have been able to maintain adequate capital, liquidity, and profitability. However, NRB indicates that this very growing role of the financial sector outside of banking has somehow blurred out the issues with increasing interdependencies and possible risks to the stability of the financial system.
It is the summation of the NRB's dire importance of proactive banking regulations in order to contain the risks and uphold financial stability while business conditions are changing. "Though the banking system is strong and resilient, continuous vigil on the regulatory front is required to sustain high economic growth with stability", said Governor Maha Prasad Adhikari in the report.
NRB also expresses concerns over cooperative institutions, pointing to service deviations, governance challenges, and imprudent lending practices as key risks to the safety and stability of the entities. The impact of these risks could further be compounded by political instability and economic slowdown on the overall financial system, warns NRB.
In summary, NRB has been putting great emphasis on improving the access to and availability of financial services for people who are marginalized and smaller borrowers. He reminded banks to be vigilant in their prudence of banking and discretionary vigilance to keep up their resilience amid ever-changing economic conditions.
