The audit of some large commercial banks by international auditors has been one of the conditions set by the IMF for approving the $395.9m ECF. “But it is the task to be performed after the second review of ECF to Nepal,” said an NRB official. “Article IV of the IMF just conducted a second review of the ECF in February which was supposed to be done in July last year.”
Earlier, the IMF had delayed deploying its review mission showing displeasure with the Nepali government’s import restriction measures, according to the NRB officials. Once the IMF produces its final report, it is sent for approval by the Nepal government and NRB. “The finance minister and the central bank governor need to assure the IMF they will implement its recommendation before the external audit of commercial banks is conducted,” the NRB official said. Earlier, Nepal had committed to launch in-depth, on-site inspections of 10 large banks of the country assisted by a third-party international audit firm to review loan portfolios by paying special attention to loan and collateral valuation, 'evergreening' of loans, group borrowing, and concentration risks by March 2023. “It could not take place as IMF delayed conducting the second review of ECF,” the NRB official said. The external auditors are expected to examine the true status of asset quality and unearth the reality amid suspicion that there has been an 'evergreening' of loans provided for the post-Covid recovery of the Nepali economy. The IMF raised concerns about the asset quality of Nepali banks in a press statement issued after the completion of its Article IV mission. “Bank asset quality has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima,” stated the international lender. According to the IMF, discussions with NRB officials recognized the need for the central bank to ensure appropriate reclassification of loans and close monitoring of the impact of a potential deterioration in the repayment capacity of borrowers. Despite concerns about the loan quality raised by the IMF, the central bank has however presented a not-so-worrying picture of bank loans. The NRB in its latest report said the average non-performing loans (NPLs) of Nepal’s banks and financial institutions stood at just 2.63 percent of total loans by mid-February. According to the report, the average NPL of commercial banks is at 2.49 percent, development banks at 2.82 percent, and finance companies at 7.82 percent. To date, commercial banks with private investments have not got their transactions audited by foreign auditors. In the early 2000s, two government-owned banks, namely Rastriya Banijya Bank and Nepal Bank were audited by international auditing firms under the World Bank-funded financial sector reform program. Because of large-scale defaults, the financial health of these banks was very poor forcing the government to inject large amounts of money to recapitalize them. “Now that private sector banks have also emerged as too-big-to-fail institutions, it has become necessary to ensure that their financial health is sound to prevent an event of collapse,” the NRB official said.
