Nepal Rastra Bank Publishes the Fifteenth Financial Stability Report; An In-Depth Look

The Nepal Rastra Bank (NRB) has released the fifteenth edition of its Financial Stability Report, offering an insightful overview of the nation's financial sector as of mid-July 2023. This comprehensive report, based on provisional data from Bank and Financial Institutions (BFIs), financial markets, financial infrastructures, and other financial institutions, highlights key developments and policy measures taken during the review period. It is noteworthy that some of the data used may differ from the most recent statistics or audited financials published by BFIs.

Global Economic Outlook

The global economy is witnessing a trajectory of slow yet steady growth. Factors such as the normalization of supply chains, reduction in energy prices, and tighter central bank policies have brought inflation to targeted levels in most advanced economies. However, financial vulnerabilities persist due to risks from stress in commercial real estate prices, the sovereign-bank nexus, and cyber incidents. The International Monetary Fund (IMF) forecasts global economic expansion at 3.2 percent in 2024, with advanced economies growing by 1.7 percent and emerging markets and developing economies by 4.2 percent. World trade growth is expected to remain at 3.0 percent, below the historical average of 4.9 percent, while global headline inflation is projected to decrease from 6.8 percent in 2023 to 5.9 percent in 2024.

Nepal's Economic Performance

According to Nepal's National Accounts Statistics, the economic growth for FY 2022/23 stood at 2.31 percent, with annual average consumer price inflation rising to 7.7 percent. The cautious tightening of monetary policy, supported by macroprudential regulations, has helped maintain macroeconomic stability. The trade deficit decreased by 15.5 percent to Rs. 1454.59 billion, contrasting with a 23.0 percent increase the previous year. Remittance inflows and gross foreign exchange reserves increased, bolstering the Balance of Payments (BoP) to a surplus of Rs. 290.5 billion, compared to a deficit of Rs. 255.3 billion in the previous year.

Financial Institutions and Market Dynamics

The number of BFIs has been decreasing due to the NRB's merger and consolidation stance, with 28 BFIs involved in such processes during the review year. As of mid-July 2023, there were 112 BFIs, including 20 Commercial Banks, 17 Development Banks, 17 Finance Companies, 57 Microfinance Institutions (MFIs), and one Infrastructure Development Bank. The financial sector also includes 14 life insurance companies, 14 non-life insurance companies, two reinsurance companies, four microinsurance companies, and various non-bank financial institutions such as EPF, CIT, DCGF, SSF, and the Postal Saving Bank.

Sectoral Credit Distribution and Financial Soundness

The distribution of sectoral credit during the review year revealed significant concentrations in wholesale and retail (20.15 percent), consumption loans (18.98 percent), agriculture, forestry, and beverage production (16.04 percent), agriculture and forest sector (7.57 percent), and finance, insurance, and real estate (7.49 percent). Financial soundness indicators remained better, with capital-to-risk-weighted assets ratios above the regulatory minimum, although on a declining trend. The capital adequacy ratios for commercial banks, development banks, and finance companies were 13.37 percent, 13.21 percent, and 17.01 percent respectively. Non-performing loans (NPL) increased from 1.31 percent to 3.02 percent overall, indicating some vulnerability in BFI balance sheets under stress scenarios.

Asset Growth and Profitability

Credit growth from BFIs decelerated to 3.48 percent, down from 12.91 percent the previous year, while deposit mobilization increased by 11.86 percent compared to 8.84 percent previously. BFI's profitability decreased, with net profits dropping by 7.73 percent to Rs. 76.99 billion in FY 2022/23. The total liquid assets to deposit ratio of BFIs was 27.10 percent, and net liquid assets to total deposit ratios stood at 29 percent, both above the regulatory requirement of 20 percent.

Regulatory Measures and Financial Inclusion

Market conduct regulations, including the interest spread and base rate plus premium framework, ensured consumer protection and healthy competition. The average monthly base rates of commercial banks increased to 10.32 percent from 8.32 percent, and interest spreads for commercial banks, finance companies, and development banks were 4.44 percent, 4.56 percent, and 4.59 percent respectively. The banking stability indicator rose from 0.40 in mid-July 2022 to 0.69 in mid-January 2024, reflecting increased overall risk in banking stability.

Exchange Rates and Digital Payments

The US dollar appreciated globally due to the Federal Reserve's tightened monetary policy, causing the Nepali rupee to depreciate by 2.79 percent against the dollar. By mid-July 2023, one US dollar was valued at Rs. 131.17, up from Rs. 127.51 a year earlier. The report also highlights a significant increase in the use of digital payment methods, with 10 licensed Payment System Operators (PSOs) and 27 licensed Payment Service Providers (PSPs) in operation.

Enhancing Financial Access

Financial inclusion has improved due to policies such as mandating commercial bank branches in every local level and requiring lending to deprived and prioritized sectors. Commercial banks now serve 752 out of 753 local levels, with the total number of BFI branches reaching 11,589 as of mid-July 2023.

Conclusion

The Fifteenth Financial Stability Report by Nepal Rastra Bank underscores a period of cautious optimism for Nepal's financial sector. Despite global and domestic economic challenges, the sector has demonstrated resilience through better policy measures, effective regulatory frameworks, and increased financial inclusion initiatives. The gradual reduction in the number of BFIs through mergers, coupled with the expansion of digital payment systems and continued focus on financial soundness, positions Nepal's financial landscape for sustainable growth. However, vigilance is required to address emerging risks, particularly in asset quality and sectoral credit distribution. As Nepal navigates this complex financial environment, the NRB's proactive approach will be crucial in fostering stability and ensuring continued progress.