Stress test mandatory for class B and C FIs
KATHMANDU, Jan 30: National level development banks and finance companies will have to undergo stress tests on quarterly basis to detect any underlying vulnerability in their system.
Issuing a directive, Nepal Rastra Bank has made stress testing mandatory for all national level class ‘B’ and ‘C’ financial institutions (FIs) beginning third quarter of current fiscal.
“These tests will help financial institutions detect weak spots in their system at an early stage, so that preventive actions can be taken,” said spokesperson for NRB Bhaskar Mani Gnawali. National level financial institutions will be required to report the results to NRB’s Offsite Division — Bank Supervisions Department — within 30 days of every quarter-end. The directive also states that financial institutions will have to discuss the results of stress tests with the board and at senior management level.
Back in January 2012, NRB had made stress testing compulsory for commercial banks. This year’s monetary policy had also said that stress testing will be implemented for other national level institutions as well. At present, there are 20 national level development banks and 52 national level finance companies in operation.
“Stress testing has proven to be a useful tool as the banks are more or less prepared towards mitigating their own shortfalls empirically,” said Gnawali. The stress tests determine the robustness of a financial institution by figuring out whether it will be able to withstand unfavourable economic scenarios. The same guidelines that dictate stress testing module for commercial banks will be applied for development banks and finance companies.
NRB had prepared a standard module to carry out stress test of banks based on the framework of IMF and Basel Committee on Banking Supervision. Banks need to assess their soundness in case of key risks — credit, market and liquidity risks.
According to guidelines, credit risk based test will simulate capital and earnings of bank with the increase in level of non-performing loans.
Market risk scenario will judge the relationship between change in the market risk factors such as interest rate shocks, exchange rate shocks and equity price shocks and the bank’s capital position. Meanwhile liquidity risk test will assess the banks’ ability to pay its liabilities during stressed events such as mass withdrawal or withdrawal by top depositors.
NRB relaxes deposit rule
KATHMANDU: Nepal Rastra Bank (NRB) has allowed development banks and finance companies to open interest-bearing accounts at class ‘B’ and ‘C’ institutions till the end of the current fiscal year. Earlier, these institutions were allowed to park such deposits at commercial banks only. However, of late, deposits at commercial banks have swollen while credit flow has constricted. Surplus liquidity has led to lowered deposit rate being offered to institutional depositors such as financial institutions. Development banks have Rs 11.3 billion and finance companies have Rs 9.5 billion as deposits at commercial banks, as of mid-November, 2013.
(Source: THT)
