Financial Stability Report (2014)

Presented By:Dinesh AdhikariKiran ChaulagainNabin MahathaSaroj ShresthaSuresh Karki

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Introduction• Based on the provisional data of BFIs

and other FIs as of mid July 2014

• Covers the development and risks during the year to mind July 2014.

• Published by NRB, Central Office, Banks and Financial Institutions Regulation Department, Financial Stability Unit.

• Aims to share information and ensure in the functioning of the financial system.

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Macroeconomic Development• Global Growth is projected to rebound and the strongest

rebound in growth is expected in the United States• Inflation will remain central bank targets and advanced

economies.• Inflation is projected to increase gradually as the recovery

strengthens and output gaps slowly decrease in the euro area.• Crude oil prices started to drop form 111.8 dollar a barrel

from June 2014 to reach 87.43 in August.

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Domestic Macro economic development.

Real GDP at basic price grew by 5.2 percent in 2013/14 compared to a growth of 3.5 percent in the previous year.The growth rate of the agriculture and the non agriculture sectors were 4.7 percent and 5.3 percent, respectively in 2013/14.The annual average CPI increased by 9.1 percent in 2013/14 compared to an increase of 9.9 percent in the previous year.

BOP has surplus of Rs. 127.1 billion.

Nepalese currency remained fairly stable during the later months of the fiscal year.Excess liquidity in BFIs was mopped up through OMOs in the review period.

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Financial System Performance and Stability

oReport depicts that the global banking system is now better capitalisedoNRB regulates commercial banks, development banks, finance

companies, micro finance financial institutions, FINGOs and cooperatives carrying limited banking activities.

oRecently, banking system of Nepal is experiencing an encouraging restructuring and consolidation, particularly through the merger and acquisition

oA high level committee to enhance financial stability through improved coordination between regulators, comprising NRB, SEBON, Insurance Board, Department of Cooperatives, office of the Company Registrar has been recently established.

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Number of BFIs and other institutions.

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Financial Highlights

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Asset structure of Banks

21.6

19.7

10.5

8

7.74.3

Loans & advances in %

Wholeseller & re-tailerManufacturingConstructonReal estateConsumptionAgriculture & Forestry

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Liability Structure Of Banks

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NPL and LLP ratio

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CD Ratio

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Profitability

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• Financial soundness indicators show that the banking system performing well during the year 2013/14.

• Capital fund of BFIs increased by Rs. 14.1 billion.

• Deposits in BIFs grew by 18.2 percent.

• The overall profitability of banking sector increased by 13.0 percent.

• The overall CAR of BFIs in mid-July 2014 was 12.7 percent which was 13.2 percent in previous year.

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Performance of Commercial Banks

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Stress testingCredit shockStress test results

shows that there is growing risk in credit among commercial banks.

Liquidity shockResults from stress tests

under liquidity shock shows that encouraging improvements in liquidity resilience among commercial banks.

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Co- OperativesCooperatives are supposed to be a helping hand in expanding and deepening financial access in rural areas of the country.

Nepal Rastra Bank had licensed some cooperatives to carryout limited banking function in 1990s.

As of mid-Jul 2014, 15 cooperatives are carrying out limited-banking activities.

Co-operatives have emerged as one of the major pillar of the economic as well as financial sector of the country.Cooperatives have been mobilizing huge amount of deposits and credits that equals to around 10.0 percent of total deposits and credits.

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Financial MarketsGlobal Financial and Money Market Perspective• In order to stabilize financial crisis, Federal

Reserve took extraordinary actions–Reducing short term interest rate almost to zero–Reducing long term interest rate –Purchased large number of treasury securities

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Domestic Financial MarketMoney Market • Short term interest rate remained low with weighted average 91-day

Treasury bill rate stood at 0.02%

• Weighted average inter bank rate among commercial banks declined to 0.16% from 0.86%

• Inter bank rate among other financial institution declined to 2.40% from 5.03%

• As per the modified method of spread rate calculation, the weighted average interest rate spread of commercial banks stood at 5.2 percent

• The average base rate of commercial banks remained at 8.4 percent in mid-July 2014 compared to 9.8 percent a year ago.

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Securities Market• After second Constituent Assembly Election, there is improvement

in securities market• NEPSE index increased by 99.9% to 1035.1 points & sensitive index

at 222…….5 points as against 130.3 points• Market capitalization increased by 105.5 points with contribution

of 30.4 % in GDP• Total piad up capital of listed comapanies stood at 146.5 billion

with annual growth of 16.2 % • Commercial bank’s bond of RS 2.3 billion was also listed at NEPSE

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Foreign Exchange• Gross FOREX reserves increased by 24.8%• NRB’s reserve increased by 26.4%• Convertible FOREX reserves increased by 22.9%• Inconvertible FOREX reserves increased by 23.4%• The existing level of reserves is sufficient for financing

merchandise imports of 11.5 months & merchandise and service imports of 10 months

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Policies And Infrastructures • Problems in the regulation and management of financial

institutions across the world

In 2014, FSB focused on completing the core aspects of the four fundamental areas of the G20 led international financial regulatory reforms

Building resilient financial institutions by fully implementing the Basel III capital standards

Ending too big to failAddressing shadow banking through increasing regulations and Making derivatives market safer.

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Continue…• Basel I and II only concentrated to the capital not with liquidity. • NRB has developed its own liquidity monitoring framework for the

short-term liquidity monitoring of the banks• Nepalese commercial banks will be fully compliant with the Basel III

regulations by 2019 starting early 2015.• BFIs has to maintain CRR and SLC within NRB.• Developed "Problem Bank Resolution Framework (PBRF)“• Auction-based repo, reverse repo, outright sale, outright purchase,

deposit collection and NRB bonds is used as instruments for regular, fine tuning and structural OMOs.

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• Risk based supervision• Special inspection of financial

institution• Diagnostic review

• Merger & Acquisition Bylaws

• Financial Literacy

• Payment and Settlement Reforms

• Monetary policy

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Summary and Recommendation• Nepalese financial system has been regulated by different independent

regulators

• Aims to share information and ensure transparency in the functioning of the financial system.

• The central bank is taking the necessary measures to ensure the implementation of Basel III provisions for financial stability.

• Developed "Problem Bank Resolution Framework" which spells out the detail policies and procedures for identification of problem bank and financial institutions.

• The banking sector needs to consolidate to improve its financial stability, its intermediation function, and access to finance.

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Continue…• NRB should be careful in order to implement the policies

adopted by globally, because Nepalese market is not as par with developed countries.• NRB should focus on research and development to implement

better policy for BFIs.• BFIs has to be more transparent in terms of financial

highlights.• Transparency and disclosure of data and good governance is

major factor for financial stability of Nepal.

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