IMF‚ WB to diagnose financial sector from Feb

KATHMANDU:

A joint team of the International Monetary Fund (IMF) and the World Bank (WB) is visiting Nepal in February to conduct an in-depth analysis of the domestic financial sector and identify weaknesses that have the potential to trigger a financial crisis.

The visit is part of the Financial Sector Assessment Programme, which is being introduced in the country on the request of the government and Nepal Rastra Bank.

“During the February visit, a 25-member team will carry out studies based on findings of a scoping mission fielded jointly by the IMF and WB earlier this month. This study will continue for three weeks,” a high-ranking official of the Ministry of Finance said on condition of anonymity. Another joint team of the IMF and WB will then visit the country in March, the official added.

The teams will focus on two areas — financial stability and financial development — and will cover the entire financial sector including banks, financial institutions, cooperatives and non-banking institutions like pension fund and investment trusts, among others. The financial stability part of the study will be carried out by IMF and will focus on supervisory approach, corporate governance, supervisory techniques and tools, risk management framework, credit, liquidity and operational risks, internal controls and audits.

On the other hand, the financial development part of the study will be conducted by WB. It will compare the county’s financial sector with peer countries, find out deficiencies in the financial infrastructure, identify policy challenges, and assess insolvency and business rescue frameworks, among others. “If everything goes according to plan, the team will submit a final report within May or June,” the Finance Ministry official said.

Earlier this month when the scoping mission had visited the country, it had found poor application of corporate governance principles at banks and financial institutions (BFIs), lack of liquidity risk management and contingent plans with BFIs and conflict of interest affecting BFIs credit decisions. It had also found BFIs lacking risk appetite framework and following profit targets only.

To strengthen the banking sector, the scoping mission has recommended that NRB’s supervision related works focus on risks BFIs are likely to face and not only compliance of various regulations. The scoping mission has also asked NRB to beef up its supervision resources by adding staff, providing training to them, and investing in IT infrastructure.

In this regard, the FSAP will thoroughly examine liquidity support facilities, bank resolution regime, depositor protection and inter-agency coordination before coming to a conclusion on the status of the domestic financial sector. It will also conduct top-down solvency macro test and bottom-up liquidity test.

Among others, scoping mission has identified that cooperatives sector is posing ‘elevated and rising risk’ due to weak supervision and regulation. It has also said Citizen Investment Trust works as a merchant bank but is outside oversight of Securities Board of Nepal, secondary market regulator. Also, risk provision for Employees Provident Fund is not similar to those of banks, although it is operating like a bank in practice.

Source: THT