KATHMANDU, June 14: Nepal Rastra Bank (NRB) has flagged serious challenges faced by banks and financial institutions (BFIs), warning that weak governance, rising bad loans, and regulatory evasion practices continue to undermine the stability of the financial sector.
The central bank’s Bank Supervision Report revealed that many BFIs have been tampering with reports submitted to regulators, attempting to conceal their true financial condition amid the ongoing economic slowdown. Based on inspections conducted up to the last fiscal year, NRB concluded that aggressive loan expansion in the past, coupled with recession in some sectors, has eroded loan quality and increased pressure on capital adequacy.
Revised interest rate corridor system introduced
The report noted that some banks have resorted to disbursing new loans at the end of quarters to make it appear that old loans have been repaid, thereby hiding repayment problems. NRB also found that BFIs lack robust databases to monitor the actual use of loans, with some cases showing funds transferred directly into the accounts of directors or related parties immediately after disbursement.
Institutional governance has emerged as a major concern. The report highlighted excessive power concentrated in chief executive officers, which has weakened the independence of control mechanisms. Weaknesses were also observed in internal audit systems, with risk based auditing ineffective in many banks, insufficient human resources, and thousands of unresolved audit comments lingering for years.
Liquidity risks were identified in some banks due to imbalances between short term liabilities and assets, while contingency financial resource management plans remain unimplemented. Human resource management was also found lacking, with employees in sensitive roles retained in the same positions for years, training budgets not meeting minimum requirements, and succession planning weak.
The report underscored that controlling regulatory evasion, strengthening risk management, ensuring the independence of internal audit, monitoring the end use of loans, and improving data quality remain critical challenges for BFIs.
