“Only after Nepal made such a political commitment, the IMF approved the global monetary advisor on May 1 decided to release the second installment of Extended Credit Facility (ECF) worth about $52.8m as the second installment,” said a senior official of Nepal Rastra Bank (NRB).
Even though Nepal received about $110m as the first installment, the Washington-based organization had delayed the second installment stating that Nepal did not fulfill the conditions, especially due to its eight-month-long import ban since April 2022 on certain products amid its depleting foreign exchange reserves. “The banks whose auditing will be conducted by the external auditor will be determined after holding consultation with the IMF,” the NRB official said. Even though NRB has been reporting very low defaults of loans in Nepal’s banking system, the IMF is not convinced that defaults are as low as it has been reported. The concern is reflected in the press statement issued at the conclusion of the Article IV mission in late February.“Bank asset quality [in Nepal] 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,” the IMF said in the statement. As per the IMF, discussions with central bank officials recognised 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. “Prudent monitoring of the impact of unwinding pandemic-related support measures and deterioration in repayment capacity of borrowers on asset quality is critical,” the IMF said. “The NRB should ensure banks vigorously differentiate viable borrowers with temporary liquidity shortages from nonviable ones.” This, according to the IMF, will help the NRB to get a better overview of the health of the loan portfolio of Class A banks prior to launching loan portfolio reviews of the ten largest banks assisted by independent international auditors by end-April 2024. “The global monetary advisor is concerned whether loans were given to the right borrowers and whether there has been evergreening of the loans,” the central bank official said. The government and the central bank have admitted in the joint letter that non-performing loan (NPL) levels are still relatively low, and capital adequacy ratios are above the regulatory minimum, but concerns remain. “Pandemic-related support measures—including debt service moratoria, extension of grace periods and relaxations in provisioning levels and asset classification rules—provided important relief to the economy, and helped maintain relatively low NPL levels,” the government said in the letter. But, the NPLs increased from 1.3 percent in July 2022 to 2.6 percent as of January 2023, reflecting the decline in the repayment capacity of borrowers. “NPLs may increase further and we remain committed to prudently monitoring the banking sector to ensure that loans are appropriately classified, and that provisioning and capital remain adequate for all banks,” the letter states. “The envisaged amendments to the asset classification regulation will encourage banks to engage in restructuring of loans to firms that are viable but have temporary liquidity shortages.”
