NRB should have power to shut down sick banks: IMF
KATHMANDU:
Nepal Rastra Bank (NRB) should be better equipped with the power to liquidate sick financial institutions for the overall financial stability, according to International Monetary Fund (IMF).
“NRB needs to include the clauses in the Bank and Financial Institutions Act that will give the central bank the authority to shut down or liquidate those financial institutions that have little chance of being revived,” recommended Paul Mathieu, advisor at IMF’s Monetary and Capital Markets Department. At present, the liquidation of a financial institution can only be undertaken following a court verdict, which can lengthen the whole process indefinitely.
During a press conference held by IMF representatives after the completion of IMF’s annual Article IV Discussions and Financial Sector Assessment Programme (FSAP), Mathieu said there is a lot of room for improving regulatory framework despite NRB’s commendable job. “There are concerns regarding existence of interconnected lending among the promoters of a financial institution and their businesses, asset quality and number of financial institutions,” said Mathieu, who headed the team that recently finished conducting a study of the Nepali financial market under FSAP.
He also stressed the need to effectively regulate burgeoning cooperative sector, calling it ‘one of the domestic risks for the economy as a whole’.
Although, FSAP’s report will not be publicised before June, the IMF experts have recommended measures such as strengthening legal framework by upgrading BAFIA, Deposit Insurance Act and initiating the mechanism of collateral registry to avoid possibility of multiple pledging of the same collateral.
“There are far too many banks and many are weak and small,” pointed out Alexander Pitt, IMF’s mission chief for Asia and Pacific Department, adding that although mergers are good, the central bank needs to be careful about not allowing merger of two bad institutions, which will create one bigger and weaker bank.
IMF reiterated its stance against NRB’s move to cap interest rate spread at five per cent. “The cap on interest spread will increase the risk of mispricing of risks — that is, banks may lend at lower rate than viable just to maintain spread or may not lend at all,” he warned.
IMF has recommended NRB to have authority to issue securities such as treasury bills to manage excess liquidity that might encourage risky lending, as in the present context, the central bank does have the capacity to absorb liquidity higher than
Rs 19.5 billion.
The growth in remittance has helped the Nepali economy and in supporting the families; however, it has driven up wages and thus hit competitiveness in agriculture and industry, pointed out Pitt, stressing the need to harness the remittance to support economic development.
Economic growth forecast at 4.5pc
International Monetary Fund (IMF) has estimated that Nepal will achieve growth of 4.5 per cent in the current fiscal year. Nepali government had projected growth of 5.5 per cent in the current fiscal year. The growth will be driven by the recovery in agriculture, strong services and rising public spending, according to IMF. The IMF projects inflation level for the current year to stand at eight per cent — the target set by the government.
Source: THT
