CBFIN Calls for Reduction in Risk Weightage and Policy Changes in Nepal's Financial Sector

Risk weightage, in the context of banking and finance, refers to a percentage assigned to assets or loans based on their perceived risk level. This percentage determines the amount of capital a bank or financial institution needs to hold as a safety buffer against potential losses. Higher-risk assets receive higher risk weightages, while lower-risk assets receive lower risk weightages. For instance, if a loan has a risk weightage of 50%, the bank must hold capital equal to 50% of the loan amount to safeguard against potential losses. This calculation is crucial in determining a bank's capital adequacy ratio, a measure of its financial strength.

The Confederation of Commercial Banks and Financial Institutions Nepal (CBFIN) has demanded a reduction in the risk weightage of large loans. In a statement issued on Sunday after the monetary policy announcement, CBFIN also called for the removal of the system of counting short-term deposits as term deposits.

According to CBFIN, this system has inadvertently converted savings deposits into term deposits, leading to increased costs for banks and financial institutions. The confederation believes that the existence of very short-term term deposits hampers the expansion of long-term loans and has requested their removal.

CBFIN also expressed support for reducing the risk burden on small loans to facilitate access to credit for domestic small and medium industries and promote sustainable economic activities. However, CBFIN objected to setting service fees for loan investments, stating that while the arrangement to provide credit to the productive sector at a 2 percent premium is positive, controlling banks with other types of fees is not appropriate.

The confederation urged the implementation of provisions in the Bank and Financial Institutions Act (BAFIA) that gradually convert founder shares into ordinary shares. Additionally, CBFIN called for flexibility in meeting the target of the current financial year, as banks and financial institutions may struggle to meet increasing staff and operating expenses with a credit expansion of only 3.5 percent.

To achieve the target of an 11.5 percent loan expansion, CBFIN emphasized the need for flexibility in terms of capital adequacy, risk-bearing, and sectoral limits. The confederation also requested that no more digital banking licenses be issued, as banks themselves provide digital services and granting such licenses has led to a trend of non-payment of interest.

CBFIN welcomed the monetary policy system's aim to amend the law to control the chaotic activities of banks and financial institutions.