Financial Stability Report

Fiscal year 2018/19

(Issue No. 11)

Nepal Rastra Bank

I
Disclaimer
This Eleventh issue of the Financial Stability Report is based on the provisional data
of Bank and Financial Institutions (BFIs) and other financial institutions as of mid-
July 2019. Data used in its analysis may thus differ from the most recent statistics
or audited financials published by BFIs. The colors, boundaries, denominations or
any other signs and symbols used in the report do not imply any metamorphic
judgments. This report, unless or otherwise stated elsewhere, covers the financial
performance and phenomena observed during the fiscal year ended mid-July 2019.
All the data and information in this report are retrieved from NRB depository,
unless stated.
Nothing herein shall constitute or be considered a limitation upon or waiver of the
provisions of existing rules, regulations and legislations.

Published by:
Nepal Rastra Bank
Central Office
Banks and Financial Institutions Regulation Department
Financial Stability Unit
Baluwatar, Kathmandu
Nepal
Ph: 977 1 4411407
Fax: 977 1 4414552
Email: [email protected]

II
 Contents
Foreword iX

Executive Summary X

Chapter - I : Macroeconomic Development 1

1.1 Global Economic Growth 1
1.2 Domestic Macroeconomic Development 4
Chapter - II : Financial System Performance and
Stability 9
2.1 Global Financial Stability Overview 9
2.2 Overview of Nepalese Financial System 11
2.3 Directed Lending 19
2.4 Liability Structure of the Banking Sector 20
2.5 Financial Soundness Indicators 21
2.6 Banking Sector Consolidation: Merger & Acquisition 29
2.7 Financial Access and Inclusion 30
2.8 Performance and Reform of State Owned Banks (SOBs) 34
2.9 Infrastructure development bank 35
Chapter – III : Performance of Financial Institutions 36
3.1 Performance of Commercial Banks 36
3.2 Stress Testing of Commercial Banks 38
3.3 Performance of Development Banks 40
3.4 Stress Testing of Development Banks 43
3.5 Performance of Finance companies 46
3.6 Stress Testing of Finance Companies 47
3.7 Performance of Microfinance Financial Institutions 49
3.8 Financial Literacy 51

III
Chapter - IV : Non Banking Financial Institutions 53
4.1 Performance of Cooperatives 53
4.2 Other Financial Institutions 54
Chapter - V : FINANCIAL MARKETS 59
5.1 Global Financial Market Perspectives 59
5.2 Domestic Financial Market 61
Chapter - VI : Payment System 65
6.1 Evolution of Payment System 65
6.2 Legal Framework 65
6.3 Liscensing 67
6.4 Large Value Payments 68
6.5 Retail Payments System 69
6.6 Payment Systems Development and financial stability 69
Chapter - VII : FINANCIAL SECTOR POLICIES AND
INFRASTRUCTURES 71
7.1 Domestic Policy Developments 71
7.2 Measures undertaken by NRB to maintain financial stability 75
ANNEXES 77
Annex 1: Aggregate Statement of Assets and Liabilities of BFIs
Annex 2: Profit and Loss Statement of Bank and Financial Institutions
Annex 3: Major Financial Indicators of Microfinance Financial Institutions
Annex 4: Sector-wise, Product-wise and Security-wise Credit Flow from BFIs
Annex 5: Major Financial Indicators
Annex 6: Composition of Financial Stability Oversight Committee and Financial
Stability Sub-Committee
REFERENCES 84

IV
 List of Figures
Figure No. and Title Page No.
Figure 1.1: Consumer Price 3
Figure 1.2: Europe Brent Spot Price FOB 3
Figure 1.3: GDP Growth Rate at basic prices 4
Figure 1.4: Sectoral GDP Growth 5
Figure 1.5: Changes in Consumer Price Index 5
Figure 1.6: Government Expenditure and Revenue 5
Figure 1.7: Growth Rate of Money Supply 6
Figure 1.8: Growth Rate of Export and Import 7
Figure 2.1: Structure of Assets Holding in Financial System 14
Figure 2.2: Total Assets and Assets to GDP Ratio Growth 14
Figure 2.3: Number and Growth of BFIs Licensed by NRB 15
Figure 2.4: Total Assets of Banking System and Assets Growth Rate 15
Figure 2.5: Product wise Lending of BFIs 17
Figure 2.6: Real Estate Exposures of BFIs 17
Figure 2.7: Loan Against Collateral of Fixed Assets 18
Figure 2.8: Productive Sector Lending of Commercial Banks 19
Figure 2.9: Deprived Sector Lending of BFIs 19
Figure 2.10: Liability Structure of BFIs 20
Figure 2.11: Deposit Liabilities by Types of Account 20
Figure 2.12: Capital Adequacy of BFIs 21
Figure 2.13 : Core Capital and Overall CAR of Commercial Banks 21
Figure 2.14: NPL of BFIs 22
Figure 2.15: Provision vs. Actual Loan Loss 22
Figure 2.16: NPL Composition of BFIs 22
Figure 2.17: Trends in Credit Growth 23
Figure 2.18: Trends in Deposit Growth 23

V
Figure 2.19: Credit, Deposit and CD Ratio of BFIs 23
Figure 2.20: Credit, Deposit with GDP ratio and Saving Deposit Ratio of BFIs 24
Figure 2.21: Class wise Profitability of BFIs 24
Figure 2.22: Net Profit, ROE, ROA and Interest Margin to Gross Income 24
Figure 2.23: Income Distribution of BFIs 25
Figure 2.24: Liquidity in BFIs 25
Figure 2.25: Base Rates of Commercial Banks 28
Figure 2.26: Net Interest Spread of CBs in Percentage Point 29
Figure 2.27: Deposit Rate, Lending Rate, Spread Rate & Base Rate of
Commercial Banks 30
Figure 2.28: Branches of BFIs 31
Figure 2.29: Highest Concentration of BFIs 32
Figure 2.30: Lowest Concentration of BFIs 32
Figure 2.31: Share of SOBs in Total Assets of CBs 33
Figure 2.32: Paid-up Capital, Capital Fund & Deposits of SOB 34
Figure 2.33: Capital Adequacy in SOBs 34
Figure 2.34: NPL and LLP Ratios of SOBs 34
Figure 3.1:Capital Adequacy of Commercial Banks 36
Figure 4.1: Capital, Deposit and Credit growth of Cooperatives 53
Figure 4.2: No. of Policies issued by insurance companies 55
Figure 5.1: Daily Yield Curve Rates for 3-Month T-bill 59
Figure 5.2: Daily Yield Curve Rates for 10-Year T-note 59
Figure 5.3: Europe Brent Crude Oil Price 60
Figure 5.4: Movement of US Dollar Index 60
Figure 5.5: Movement of Nominal Exchange Rate (NRs/US$) 60

VI
 List of Tables
Title Page No.
Table 1.1. Overview of the World Economic Outlook Projection 2
Table 2.1: Number of BFIs and Other Institutions 12
Table 2.2: Structure of the Nepalese Financial Sector 13
Table 2.3: Credit Distribution in the Banking System 16
Table 2.4: Financial Soundness Indicators of BFIs 26
Table 2.5: Number of Branches of BFIs 31
Table 2.6: Provincial Allocation of BFI Branches 32
Table 2.7: Use of Financial Services 33
Table 3.1: Major Financial Indicators of Commercial Banks 37
Table 3.2: Major Indicator of Development Banks 42
Table 3.3: Summary Result of Stress Testing of Development Banks 44
Table 3.4: Summary Result of Stress Testing of Finance Companies 47
Table 3.5: Major Financial Indicators of Finance Companies 48
Table 3.6: Key performance Indicators of MFIs 49
Table 4.1: Key Figures of Cooperatives 53
Table 4.2: Growth in Cooperatives Over the Years 54
Table 4.3: Sources and Uses of Funds of Insurance Companies 55
Table 4.4: Key Indicators of Employee Provident Fund 56
Table 4.5: Key Figures of Citizen Investment Trust 57
Table 5.1: Securities Market Participants 61
Table 5.2: Primary Market Status 62
Table 5.3: Secondary Market Indicators 63
Table 6.1: Licensed Institution to Perform Electronic Payment 68

VII
 List of Abbreviation
International Organization of
ADBL Agriculture Development Bank Limited IOSCO
Securities Commissions
AE Advanced Economies IPO Initial Public Offering
ANNA Association of National Numbering Agencies IRC Interest Rate Corridor
International Securities
ASBA Application Supported by Blocked Amount ISIN
Identification Number
ATM Automated Teller Machine LCR Liquidity Coverage Ratio
BAFIA Bank and Financial Institution Act LCY Local Currency
BFIs Bank and Financial Institutions LLP Loan Loss Provision
Liquidity Monitoring and
BoD Board of Director LMFF
Forecasting Framework
CAR Capital Adequacy Ratio LoLR Lender of Last Resort
CB Commercial Banks LTV Loan to Value Ratio
CBS Central Bureau of Statistics MFIs Microfinance Financial Institutions
CCB Capital Conservation Buffer NBA Non-Banking Assets
CDatio Credit to Deposit Ratio NBL Nepal Bank Limited
CEO Chief Executive Officer NEPSE Nepal Stock Exchange Limited
CIT Citizen Investment Trust NSFR Net Stable Funding Ratio
CPI Consumer Price Index NGO Non-Government Organization
Nepal Industrial and Development
CRR Cash Reserve Ratio NIDC
Corporation
CSR Corporate Social Responsibility NPA Non-Performing Assets
DBSD Development Bank Supervision Department NPLs Non-Performing Loans
DCGF Deposit and Credit Guarantee Fund NPR Nepalese Rupees
DoC Department of Cooperatives NRB Nepal Rastra Bank
ECB European Central Bank PCA Prompt Corrective Action
Problem Institution Resolution
FI Financial Institution PIRD
Division
EMDE Emerging Market and Developing Economies RBB Rastriya Banijya Bank
EMEs Emerging Market Economies ROA Return on Assets
EPF Employee Provident Fund ROE Return on Equity
FINGO Financial Non-government Organization RSRF Rural Self Reliance Fund
FEMD Foreign Exchange Management Department RWA Risk Weighted Assets
FSAP Financial Sector Assessment Program SOBs State Owned Banks
FSI Financial Soundness Indicators SEBON Security Board of Nepal
GBBs Grameen Bikash Banks SLF Standing Liquidity Facility
GDP Gross Domestic Product SLR Statutory Liquidity Ratio
GFSR Global Financial Stability Review SOL Single Obligor Limit
GON Government of Nepal US United States
IMF International Monetary Fund WEO World Economic Outlook
INR Indian Rupees

VIII
 FOREWORD
Nepal Rastra Bank (NRB), the central bank of Nepal,
has a mandate of maintaining and safeguarding stability
of the domestic financial sector, among others. This
responsibility is being discharged through disclosure of
financial information in a transparent manner, to help
manage market expectations. In this regard, the Bank
has been publishing the Financial Stability Report since
2012 to meet this objective with focus on the risks and
vulnerabilities of the domestic financial system.
Nepalese financial sector has recorded continuous robust growth in the size of total
assets and liabilities of banks and financial institutions. Further, the implementation
of prudential regulation has avoided excessive build-ups of exposures in a particular
sector or industry on the one hand and bolstered the macroeconomic stability on
the other hand. In this regard this eleventh issue of the financial stability report,
undergoes an analytical review of the domestic banking and financial system and
the achievements accomplished through the implementation of key regulations/
policies.
I believe that this will prove to be extremely useful to the concerned stakeholders.
Besides helping for the better understanding of the trends and developments across
the financial sector, it will contribute towards communicating key stances taken by
the NRB in terms of policies and efforts for maintaining stability as mandated by
the Nepal Rastra Bank Act, 2058.
Lastly, I appreciate Financial Stability Oversight Committee Chaired by Deputy
Governor and also Executive Director of this Bank’s Banks and Financial Institutions
Department for coordinating with all departments and officials for bringing out this
invaluable publication.
Thank You,

Maha Prasad Adhikari

Governor

IX
 Executive Summary
The world economy grew at 3.6 percent in 2018. It is expected to slow down to
3.0 percent in 2019 and improve modestly by 3.4 percent in 2020, according to the
World Economic Outlook (WEO) published by the IMF in October 2019. Advanced
economies grew by 2.3 percent in 2018 and are projected to slow down to 1.7
percent both in 2019 and 2020. Emerging market and developing economies grew
by 4.5 percent in 2018 and are projected to experience to grow at a slower rate of
3.9 percent in 2019 and rebound to 4.6 percent in 2020.

The Global Financial Stability Report (GFSR) of IMF, October 2019, highlights
the impact of regional tensions and how they have caused global growth to decline
to the lowest level since the global financial crisis during 2007-09. Although the
growth is expected to improve slightly, the availability of funds at lower interest
rates have caused investors to seek a low interest-high yield investment, which is
generally a phenomenon associated with high risk. These tendencies have given
rise to new set of vulnerabilities which could jeopardize the stability of developed
as well as developing economies. As a result, the GFSR advised policy makers
to improve transparency, with a greater disclosure norm, for non-bank financial
institutions. The GFSR also advised to adopt an improved and stringent sectoral
supervisory, macro-prudential as well as regulatory norms for safeguarding the
economy and maintaining the stability.

In Nepal, the annual average consumer price inflation increased to 4.6 percent in
FY2018/19 from 4.2 percent in FY2017/18. The inflation rate of 4.6 percent has been
lower than target of 6.5 percent set for FY2018/19. The Central Bureau of Statistics
(CBS) estimated the real Gross Domestic Product (GDP) growth at producers’ price
for FY 2018/19 at 7.05 percent. This is higher than the revised estimate of 6.66
percent of FY2017/18. Similarly, the real GDP at basic price is estimated to grow
by 6.81 percent compared to the revised growth of 6.30 percent in the previous
year. Merchandise trade deficit widened 13.5 percent to NPR 1,321.42 billion in
FY2018/19 compared to the growth of 26.9 percent in FY2017/18. The export-
import ratio increased from 6.5 percent in 2017/18 to 6.8 percent in the review year.
Total merchandise trade deficit, as percentage of GDP slightly improved from 38.4
percent in 2017/18 to 38.1 percent in the current year 2018/19.

Net services of the BoP worsened from a surplus of NPR 2.27 billion in 2017/18 to
a wider deficit of NPR 16.52 billion in the review year. The workers’ remittances
increased 16.5 percent to NPR 879.27 billion, in the review year, compared to a
growth of 8.6 percent in the previous year. The ratio of workers’ remittances to GDP
increased to 25.4 percent in FY2018/19 from 24.9 percent in FY2017/18. The net

X
transfer receipts increased by 15 percent to NPR 994.78 billion, in the review year.
Such receipts had increased at a much slower rate of 1.5 percent in the previous
year.

The Nepalese banking system has been undergoing restructuring and consolidation,
particularly through the merger/acquisition and increased paid-up capital
requirements. Consequently, as of mid-July 2019, the total number of banks and
financial institutions have shrunk to 168 comprising of 28 commercial banks, 28
development banks, 22 finance companies, and 90 microfinance development
banks. Besides, 39 insurance companies, 1 reinsurance company and several non-
bank financial institutions such as Employees Provident Fund (EPF), Citizens
Investment Trust (CIT), Social Security Fund (SSF) and a postal saving bank are
also in operation.

The share of banks and financial institutions in total assets and liabilities of the
financial system stood at 76.99 percent in mid-July 2019. In terms of assets,
commercial banks remained the key player in the financial system followed by
development banks. In case of contractual saving institutions, EPF is a dominant
institution followed by insurance companies.
The non-performing loans (NPL) of bank and financial institutions (BFIs) increased
to NPR 44.18 billion in mid-July, 2019 compared to NPR 38.51 billion in mid-July
2018. Nevertheless, there was an improvement in ratio of NPL to total loans. The
banking sector also improved its assets quality. This was a reflection of sufficient
provisions made in the years 2012-2019, indicating the banking sector’s resilience
at large. The NPL to total loans of banking industry stood at 1.52 percent, comprising
1.40 percent in commercial banks, 0.92 percent in development banks and 8.80
percent in finance companies.

The pace of credit flows from BFIs slowed down from 21.47 percent in 2017/18
to 20.18 percent in 2018/19. Credit of commercial banks, development banks, and
finance companies expanded by 18.25 percent, 36.29 percent and 19.86 percent,
respectively, in mid-July 2019. Deposits of BFIs increased by 18.24 percent in
mid-July 2019. The deposit growth of commercial banks, development banks
and finance companies registered a growth of 16.53 percent, 31.96 percent and
19.56 percent, respectively, in mid-July 2019. The overall profitability of banking
sector has increased by 21.01 percent to NPR 74. 23 billion in mid– July 2019. The
growth rate of profitability of banking sector in the last year was 12.20 percent. The
commercial banks posted the highest share of profitability of the banking sector,
accounting for 87.85 percent of the total in mid-July 2019.

XI
Following the issuance of the “Bank and Financial Institutions Merger By-laws,
2011”; as a result of mergers, as of mid-July 2019, the number of BFIs have come
down from 171 to 43. As of mid-July, 2019, the branch network of commercial
banks reached 3,585 followed by development banks (1,267), finance companies
(205) and micro finance financial institutions (3,629). On an average, a BFI branch,
excluding the branches of ‘D’ class financial institutions, has been serving around
5,776 people. The population served by the BFIs comes down to 3,363 people per
branch, if the branches of “D” class financial institutions are also included.

As of mid-July 2019, deposits of cooperatives totaled NPR 345.58 billion while

their total credit stood at NPR 332.71 billion. There are altogether 40 insurance
companies (20 non-life, 19 life and 1 re-insurance) as of mid-July 2019. The data
received from Insurance Board of Nepal reveals that in FY 2018/19, total assets/
liabilities of insurance companies rose by 33.36 percent to NPR 347.15 billion.
According to unaudited figures of mid-July 2018, the total assets/liabilities of EPF
had increased by 18.64 percent to NPR 346.64 billion, in FY2018/19. Likewise,
the funds collected by the EPF in FY 2018/19 grew by 11.15 percent to NPR
309.85 billion. Similarly, net fund collections of CIT stood at NPR 148.90 billion in
FY2018/19. CIT’s net fund collection in 2018/19 represents a growth rate of 30.54
percent over such collection of NPR114.06 billion in mid-July 2018

Short-term and long-term interest rates in the financial market remained relatively
high in FY2018/19 in comparison to that of FY2017/18. In FY 2018/19 NPR
depreciated by 0.76 percent against US dollar compared to a sharper depreciation
of 6.30 percent in the previous year. To be specific, the exchange rate of one US
dollar stood at NPR 113.48 in mid-July 2019 compared to NPR 109.34 in mid-July
2018. The NEPSE index rose by 3.8 percent, to 1,259.02 points, in mid-July 2019
compared to 1212.36 points in mid-July 2018. The float index, which was 87.15
points in mid-July 2018, increased by 6.1 percent to 92.43 points in mid-July 2019.

During the review period, NRB issued license to eleven development banks, one
finance company and five non-BFIs to work as payments system operators (PSO)
/ payments services providers (PSP). Among five non-BFIs, two are licensed as
PSOs and three as PSPs. Similarly, letter of intent (LOI) for 17 institutions have
been issued during the review period to operate as PSOs and PSPs. With this, all the
commercial banks, 15 development banks, and five finance companies are operating
as PSO/PSP. Apart from this, there are a total 16 institutions, licensed by NRB,
operating as payment institutions. Among them six are PSOs and 10 are PSPs.

XII
 Macroeconomic Development

Chapter - I
Macroeconomic Development

1.1 Global Economic Growth

The world economy which grew by 3.6 percent in 2018 is expected to slow down
to 3.0 percent in 2019 and improve modestly by 3.4 percent in 2020 according to
World Economic Outlook (WEO) published by IMF in October 2019.The report
attributes such slowdown to factors such as rising trade barriers, elevated uncertainty
surrounding trade, and structural factors.
According to WEO advanced economy grew 2.3 percent in 2018 and is projected
to slowdown at the same rate of 1.7 percent in 2019 and 2020. The slowdown in
economic growth of major advanced countries such as US, Euro area, UK, Canada
and others caused the lower growth in 2019 compared to 2018. Emerging market
and developing economies grew 4.5 percent in 2018. The growth rate in this group
of countries is projected to slow down to 3.9 percent in 2019 and then pick up to
4.6 percent in 2020.
Among the advanced economies, the US economy, as a response to fiscal stimulus,
is expected to be expand by 2.4 percent in 2019 and by 2.1 percent in 2020. Owing
mainly to sluggish export performance, the Euro Area is expected to grow by a
smaller magnitude of 1.2 percent in 2019 and 1.4 percent in 2020. The growth rate
is expected to scale up in the United Kingdom, Germany, Italy, Canada and France
and other advanced economies and scale down in Spain and Japan from 2019 to
2020.
Among the Emerging and Developing Economies, the growth rate of China is
expected to remain at 6.1 percent in 2019, and 5.8 percent in 2020 on account of
trade frictions. Like China, India is expected to grow by 6.1 percent in 2019, and is
projected to accelerate to 7.0 percent in 2020.
Emerging market economies particularly, Argentina, Iran, Turkey, Venezuela, Libya
and Yemen have been experiencing severe macroeconomic distress. Other large
emerging market economies-Brazil, Mexico, Russia, and Saudi Arabia, among
others, are projected to grow considerably below their historical averages. In India,
corporate and environmental regulatory uncertainty, together with concerns about

1
Macroeconomic Development

the health of the nonbank financial sector, has softened growth in 2019. These
economies have driven part of the projected decline in growth in 2019.The growth
rates of some emerging economies such as Brazil, Russia, South Africa, and Mexico
are expected to scale up in 2020 compared to 2019 (IMF, 2019).
Table: 1.1 Overview of the World Economic Outlook Projection
Year over Year
Estimate Projections
  2017 2018 2019 2020
World Output 3.8 3.6 3.0 3.4
Advanced economies 2.5 2.3 1.7 1.7
United States 2.4 2.9 2.4 2.1
Euro Area 2.5 1.9 1.2 1.4
Germany 2.5 1.5 0.5 1.2
France 2.3 1.7 1.2 1.3
Italy 1.7 0.9 0.0 0.5
Spain 3.0 2.6 2.2 1.8
Japan 1.9 0.8 0.9 0.5
United Kingdom 1.8 1.4 1.2 1.4
Canada 3.0 1.9 1.5 1.8
Other Advanced Economies1 2.9 2.6 1.6 2.0
Emerging Markets and Developing
Economies 4.8 4.5 3.9 4.6
Russia 1.6 2.3 1.1 1.9
Emerging and Developing Asia 6.6 6.4 5.9 6.0
China 6.8 6.6 6.1 5.8
India 7.2 6.8 6.1 7.0
ASEAN-52 5.3 5.2 4.8 4.9
Emerging and Developing Europe 3.9 3.1 1.8 2.5
Latin America and the Caribbean 1.2 1.0 0.2 1.8
Brazil 1.1 1.1 0.9 2.0
Mexico 2.1 2.0 0.4 1.3
Saudi Arabia -0.7 2.4 0.2 2.2
Sub-Saharan Africa 3.0 3.2 3.2 3.6
Nigeria 0.8 1.9 2.3 2.5
South Africa 1.4 0.8 0.7 1.1

2
 Macroeconomic Development

Memorandum        
Low-Income Developing countries 4.7 5.0 5.0 5.1
World Growth Based on Market Exchange
Rates 3.2 3.1 2.5 2.7
Consumer Prices        
Advanced Economies 1.7 2.0 1.5 1.8
Emerging Market and Developing
Economies3 4.3 4.8 4.7 4.8
Source: World Economic Outlook Update, October 2019.
1/ Excludes the G7 (Canada, France, Germany, Italy, Japan, United Kingdom, United
States) and euro area.
2/ Indonesia, Malaysia, Philippines, Thailand, Vietnam.
3/ Excludes Venezuela
Figure 1.1: Consumer Price
1.1.1 Inflation 7
Advanced Economies
According to WEO (October 2019), Emerging Market and Developing Economies*
6

advanced economies experienced a 2 5

percent rate of inflation in 2018. In the 4

Percent

same year, emerging and developing 3

economies had a rate of inflation of 2

4.8 percent. In 2019, In 2019 and 1

2020 inflation forecast for advanced 0

2016 2017 2018 2019 2020
economies is subdued at 1.5 percent and Year
*Excludes Argentina and Venezuela
1.8 percent respectively. The inflation Source: World Economic Outlook, Oct. 2019

forecast for emerging and developing

economies is 4.7 percent for 2019 and Figure 1.2: Europe Brent Spot Price FOB
110
4.8 percent for 2020. However, core
100
inflation remained different across the 90
advanced countries.
U.S. dollars per barrel

80

1.1.2 Crude Oil

70

60

According to WEO (October 2019), 50

the price of Brent crude oil increased 40

by 29.4 percent in mid-Oct 2018 30

III IV I II III IV I II III IV I II III IV I II III IV I II III
which is expected to decline by 9.6 2014 2015 2016 2017 2018 2019

percent in 2019 and by 6.2 percent in

Year
Source: U.S. Energy Information Administration

3
Macroeconomic Development

2020. Compared to 2017, Brent Crude Oil prices had risen by 23.3 percent in
the corresponding period of 2018.
During 2018, the price of a barrel of Brent crude fluctuated, in US dollar terms,
between 50.57 and 86.07 averaging U. S. $ 71.33 during.

1.2 Domestic Macroeconomic Development

The Nepali economy continued its higher growth momentum in the FY2018/19.
Increase in agricultural production, ease in energy supply, acceleration in construction
activities, expansion in industrial production and an uptick in tourist arrival have
contributed to higher economic growth. Consumer price inflation remained within
control. Nevertheless, the balance of payments (BOP) and current account recorded
deficit posing risk to external sector stability. The surge in current account deficit
was due to the elevated level of import of petroleum products, transport equipment
and parts, and industrial goods. Actual budget expenditure remained at 81.18
percent of total estimate in FY2018/19.

1.2.1 Economic Growth

Central Bureau of Statistics (CBS) Graph 1.3: GDP Growth Rate at Basic Prices

estimated the growth of real GDP (at 10

producers’ price) at 7.05 percent in 8

FY2018/19 compared to 6.66 percent
in FY2017/18. Similarly, the real GDP, 6
Percent

at basic price, is estimated to grow by

6.81 percent compared to a growth of
4

6.30 percent in the previous year. GDP 2

grew at a healthy rate due to expansion

of electricity, power and gas sector, 0
2015 2016 2017 2018 2019
pick up in construction activities, Fiscal year ending mid-July

improved output of industrial sector Source: CBS

and increased tourist arrivals among others.

In the review year, the agriculture sector exhibited an increased growth of 5.0
percent mainly due to favorable weather condition. Non-agricultural sector grew
by 7.5 percent, which is compared to the growth of 7.7 percent in FY2017/18.
The industrial sector grew by 8.1 percent in the review year basically on account of
the regular power supply and improved investment climate. Such growth was 9.6
percent in FY 2017/18.

4
 Macroeconomic Development

In the review year, the service sector Graph 1.4: Sectoral GDP Growth

grew by 7.3 percent mainly due to 16

Agriculture Sector

increased tourists’ inflow, expansion

Industrial Sector
12 Service Sector

of trade and communication sector 8

and the performance of social sectors

Percentage
4
such as health and education. Such
growth was 7.2 percent in the previous 0

year (CBS, 2019). -4

-8

1.2.2 Inflation 2015 2016 2017

Fiscal year ending mid-July
2018 2019

Annual average consumer price inflation Source: CBS

increased to 4.6 percent in FY2018/19 Figure 1.5: Changes in Consumer Price Index
from 4.2 percent in the previous year. 12
CPI Inflation
Yet, it was lower than the targeted 6.5 10 Food & Beverage
Non-food and Services
percent. The normal supply situation
and lower global prices, including that
8
Percentage

of India, contributed to the moderation 6

of consumer inflation in the review 4

year. While the average food inflation 2

increased to 3.1 percent in FY2018/19
from 2.7 percent a year ago, the nonfood
0
2015 2016 2017 2018 2019

inflation increased to 5.9 percent in the

Fiscal year ending mid-July

review year from 5.3 percent a year ago (NRB, 2019).

1.2.3 Government Finance

In 2018/19, the government revenue Figure 1.6: Growth Rate of Government Expenditure
at NPR 865.55 billion recorded a and Revenue

growth of 19.1 percent, on top of a 50

19.3 percent growth in 2017/18. The

Government Expenditure
Government Revenue
40
2018/19 revenue represented 91.54
percent of its budgeted target (i.e. NPR
Percentage

30

945.55 billion). Revenue-to-GDP ratio

20
in 2018/19 increased by a percentage
over last year to 25.0 percent. Of the 10

total revenue, the share of tax revenue

and non-tax revenue stood at 88.3
0
2015 2016 2017 2018 2019

percent and 11.7 percent, respectively, Fiscal year ending mid-July

5
Macroeconomic Development

in the review year. In the previous year, the shares of tax and nontax revenue in the
total revenue were 90.1 percent and 9.9 percent, respectively.
Government expenditure, based on banking transaction, increased marginally by
0.1 percent to NPR 1067.67 billion in FY2018/19. In 2017/18, such expenditure had
risen substantially by 30.7 percent. During the review year, recurrent expenditure
increased by 2.7 percent to NPR 712.31 billion compared to a growth of 35 percent
in the preceding year. Such expenditure outturn stood at 84.25percent of the initial
budget estimate.
The capital expenditure in 2018/19 decreased absolutely by11.8 percent to NPR
232.42 billion in contrast to an encouraging growth of 32.3 percent in the previous
year. The capital expenditure in the review year accounted for 74.02 of allocation.
Expenditure under ‘Financing’ increased by 12.6 percent to NPR 122.94 billion,
amounting to 78.95 percent of its allocated budget.

1.2.4 Monetary Sector

Growth rate of broad money (M2) Figure 1.7: Growth Rate of Money Supply
moderated to 15.8 percent in the 25
M1

review year compared to expansion

M2

20

of 19.4 percent in the previous year.

Trends in narrow money (M1) also
Percentage

15

shadows M2 Pattern, as it increased 10

by 8.6 percent in review year which

was much lower than 17.6 percent in 5

the previous year. 0

2015 2016 2017 2018 2019

The developments in money supply Fiscal year ending mid-July

aggregates was a reflection of

movements in Net foreign assets (NFA after adjusting foreign exchange valuation
gain/loss). The 2018/19 NFA decreased by NPR 67,400.5 million (6.4 percent) in
the review year in contrast to an increase of NPR 960.2 (0.1 percent) million in the
previous year. Reserve money decreased by 1.5 percent in the review year compared
to a rise of 8.1 percent in the previous year.
Domestic credit expanded by 21.24 percent in the review year compared to a growth
of 26.5 percent in the previous year. Claims of monetary sector on the private sector
also decelerated to 19.1 percent in the review year compared to a growth of 22.3
percent in the previous year.

6
 Macroeconomic Development

Deposits at banks and financial institutions (BFIs) increased by 18.24 percent in the
review year compared to an increase of 18.96 percent in the previous year. Of the total
deposits at BFIs, share of demand, saving and fixed deposits remained 9.29 percent,
31.62 percent and 45.51 percent, respectively, in mid-July 2019. Such a share was 9.3
percent, 34.5 percent and 44.8 percent, respectively, in mid-July 2018.

1.2.5 External Sector

In 2018/19, merchandise exports grew Figure 1.8: Growth Rate of Export and Import

by 19.4 percent to reach NPR 97.11 30

Export

billion. This growth rate was higher 20

Import

than the last year’s growth rate of 11.4

percent. In the review year, exports

Percentage
10

to India increased by 34.3 percent,

0
exports to China decreased by 13.5
percent and export to other countries -10
increased marginally by 0.2 percent.
-20
Total merchandise exports, 26.9as 2015 2016 2017 2018 2019

percentage of GDP, remained 2.8

Fiscal year ending mid-July

percent in the review year compared to 2.7 percent in the previous year.
Merchandise imports increased by 13.9 percent to NPR 1418.54 billion, in the
review year as against a growth of 26.9 percent in the previous year. In the review
year, imports from India, China and Other countries increased by 12.8 percent, 28.5
percent and 8.9 percent, respectively. Total import-to-GDP ratio decreased to 40.94
percent in the review year from 41.1 percent of the previous year.
Merchandise trade deficit widened by 13.5 percent to NPR 1321.43 billion, in
FY2018/19. The export-import ratio increased to 6.8 percent in the review year from
6.5 percent in the previous year. Total merchandise trade deficit as percentage of GDP
slightly fell from 38. 4 percent in 2017/18 to 38.1 percent in the review year.
In the review year, the total services receipts increased by 5.3 percent and expenses
rose at a much faster pace of 16.1 percent. As a result, the amount of net services
deficit increased massively by 7.28 folds over last year to NPR 16.52 billion.
Workers’ remittances accelerated by 16.5 percent to NPR 879.27 billion, compared
to a growth of 8.6 percent in the previous year. The ratio of workers’ remittances to
GDP increased to 25.4 percent in FY2018/19 from 24.9 percent in 2017/18. The net
transfer receipts increased by 15 percent to NPR 994.79 billion, in the review year.
Such receipts had increased by 1.5 percent in the previous year.
7
Macroeconomic Development

The inflows under capital transfer of NPR 15.46 billion and foreign direct
investment (FDI) of NPR 13.07 billion were both lower than in the previous year.
In the previous year, capital transfer and FDI inflows were NPR 17.72 billion and
NPR 17.51 billion, respectively.
Gross foreign exchange reserves decreased by 5.8 percent to NPR 1038.92 billion
as at mid-July 2019 from NPR 1102.59 billion in the same date of last year. The
share of Indian currency in total reserves stood at 23.6 percent as at mid-July 2019.
Foreign assets and liabilities of the country stood at NPR 1080.10 billion and NPR
921.94 billion respectively, as at mid-July 2019. Accordingly, the net IIP remained
in surplus of NPR 158.16 billion as at mid-July 2019. Such surplus was NPR 282.12
billion as at mid-July 2018.

1.2.6 Liquidity Situation

In the review year, NPR 322.49 billion liquidity was injected through open market
operations. BFIs used NPR 154.33 billion standing liquidity facility (SLF) in
FY2018/19. Similarly, NRB injected net liquidity of NPR 360.91 billion through
net purchase of USD 3.19 billion from foreign exchange market. NRB mopped up
NPR 100.35 billion through open market operations.
NRB purchased Indian Currency (INR) equivalent to NPR 516.97 billion through
the sale of 4.24 billion USD and other convertible currencies in the review year.
INR equivalent to NPR 522.03 billion was purchased through the sale of USD 4.76
billion in the previous year.

8
 Financial System Performance and Stability

Chapter - II
Financial System Performance and Stability

2.1 Global Financial Stability Overview

Global Financial Development Report 2019/2020, published by the World Bank,
focuses on the decade succeeding the global financial crisis and the developments
in financial sector following this crisis. Years prior to the global financial crisis
were characterized by deregulation, mostly in advanced economies, but the global
financial crisis brought about greater supervisory intrusions, greater regulatory
concerns and increased regulatory capital. The report highlights that the set of
policies for advanced economies could be too sophisticated for emerging and
developing economies and hence softer stance on its adoption is required. The
report further highlights that hike in regulatory reserves has appeared to reduce the
access to credit, but only in short run (WB, 2020).
Global Financial Stability Report (GFSR) of October, 2019 published by
International Monetary Fund, highlights on the impact of regional tensions and
how they have caused global growth to decline and reach to its lowest level since
the Global Financial Crisis (IMF, 2019 a).Global markets have been subject to twist
and turns of trade tensions and these have been kept off balance by continuing
trade uncertainty. Continuous economic expansion after the GFC seems to have
taken a downturn as global growth is slowing. Global growth rate has been
downgraded to 2.3 percent which is 0.3 percent below previous forecast. This has
been primarily attributed to regional uncertainties in areas such as Brexit and USA
– China trade frictions. In response to these, central banks have adopted an easier
and accommodative stance on monetary policy resulting in a lower interest rate.
As a result, lower rates have given rise to easier access to finance for investors
and in a lower interest rates scenario, investors are trying to generate higher yields
but, in turn, there is a tendency to invest in risky assets to achieve their targets.
These have given rise to vulnerabilities, putting growth, in medium term, at risk.
In the aftermath of GFC, banking sector, in general, is under greater regulations
and supervision which are more adapt to absorbing uncertain scenarios and are
more resilient to unfavorable situations. Thus, the vulnerabilities are greater in
non-banking financial institutions, assets managers and finance companies which
are vying for greater return on their investment without adequate risk management

9
Financial System Performance and Stability

tools, as non-banking financial institutions, in particular, are more involved in

riskier and less liquid assets. Similar instances were visible during the height of the
global financial crisis of 2007.
There is a trend of growing corporate debts and possible corporate defaults could
trigger losses in the entire sector and economic downturn by creating unemployment.
These exposures may trigger and act as an amplifier to the shocks. Even though
vulnerabilities in the banking sector continue to be modest, their lending to other
sector with risky features has generated new vulnerabilities.
Lower rates in developed economies have given rise to different sets of vulnerabilities
to the emerging economies which are obtaining those debts from developed economies.
In an event of unfavorable scenarios such as slowdown in the economies, trade tensions
and uncertainties will cause distress to the developed economies as a result of tightening
in funding conditions. As a result, those economies receiving dollar source of funding
could face distress situation which can trickle down to the developing economies
receiving cross border dollar funding, putting global financial stability at risk.
As a result, GFSR sets out certain policy recommendations to mitigate the risks.
Additional easing up on monetary policy would increase the vulnerability hence data
driven, data dependent monetary policy and clear and transparent communication of
policy is advised to avoid uncertainty. There is need for comprehensive assessment
of risk for non-banking financial institutions, hence GFSR advised that a greater
disclosure and transparency in non-banking financial institutions. Regarding
corporate debts and cross border currency relations, GFSR recommends a more
prudent debt management practices and a holistic view on overall debt and related
risks to mitigate the effects of any downside on the economy.
The GFSR has also highlighted on environmental, social, and governance (ESG)
principle of borrowing and investing as they become more significant. The report
highlights on sustainable finance and focus on developing strategies for ESG and
standards and promoting consistent ESG reporting (IMF, 2019a).
The Asian development outlook published by Asian development bank forecasts
South Asian growth to decline from 6.7 to 6.1 which can be attributed to the slowdown
in Indian economy. The report also outlines the decline in private consumption
and investment brought about by lesser than expected harvest and slow job growth
in south Asian countries. The report also points out that the political stability and
improved business environment in Nepal has caused increase in foreign investment
while remittance inflow has decreased (ADB, 2019)

10
 Financial System Performance and Stability

2.2 Overview of Nepalese Financial System

2.2.1 Size of the Overall Financial System
Nepalese financial system has been regulated by different regulators in the sectors
of banking, insurance, securities markets, contractual saving institutions and other
service sectors. NRB, as the central bank, regulates commercial banks, development
banks, finance companies, micro finance financial institutions and infrastructure
development bank. Contractual saving institutions comprises of EPF and CIT. The
Securities Board of Nepal (SEBON) regulates securities market which comprises
of stock exchange, listed companies, central securities depository, stockbrokers,
merchant bankers, credit rating agencies, mutual funds, Application Supported
by Blocked Amount (ASBA) members and depository participants. Likewise,
insurance companies are under the purview of Insurance Board and cooperatives
fall under the jurisdiction of Department of Cooperatives, Government of Nepal
(GON).
Following the financial liberalization policy adopted since the mid-1980s,
there has been proliferation of the number of BFIs in the last few decades.
The growth in the number of BFIs has moderated after NRB introduced
moratorium on licensing. For the last three years, the banking system has
been undergoing restructuring and consolidation, particularly through the
merger and acquisition. As of mid-July 2013, the Nepalese financial system
constituted of 31 licensed commercial banks (“A” class institutions), 86
development banks (“B” class institutions), 59 finance companies (“C”
class institutions), 31 micro-finance financial institutions (“D” class
institutions), 18 NRB permitted cooperatives undertaking limited banking
transactions, 31 NRB permitted NGOs for limited banking transactions,
25 insurance companies and one each of the Employees Provident Fund,
Citizen Investment Trust and Postal Saving Bank.
As of mid-July 2019, the total number of BFIs stood at 168 comprising 28
commercial banks, 28 development banks, 22 finance companies and 90
microfinance institutions. Besides, 39 insurance companies and non-bank
financial institutions in the form of EPF, CIT, DCGF, Social Security Fund
(SSF) and a Postal Saving Bank are also in operation. License provided by
NRB to some cooperatives for conducting limited banking transactions were
revoked. Similarly, NRB licensed FINGOs were converted into microfinance
institutions.

11
Financial System Performance and Stability

Table 2.1: Number of BFIs and Other Institutions

Mid- Mid- Mid- Mid-
Banks and Financial Institutions July July July July
2016 2017 2018 2019
Commercial Banks 28 28 28 28
Development Banks+ 67 40 33 29
Finance Companies++ 42 28 25 23
Microfinance Financial Institutions 42 53 65 90
Sub-Total 179 149 151 170
NRB Licensed Cooperatives 15 15 14 *
NRB Licensed FINGOs
25 25 24 **
(with limited banking activities)
Insurance Companies 26 26 38 39
Reinsurance Company 1 1 1 1
Sub Total 67 67 77 40
Securities Market Institutions
Stock Exchange 1 1 1 1
Central Depository Company 1 1 1 1
Stockbrokers 50 50 50 50
Merchant Bankers 17 24 25 30
Mutual Funds 6 9 9 9
Credit Rating Agencies 1 1 2 2
Depository Participants$ 66 65 70 72
ASBA BFIs$ 0 0 65 52
Sub-Total 76 86 88 98
Employees Provident Fund (EPF) 1 1 1 1
Citizen Investment Trust (CIT) 1 1 1 1
Postal Saving Bank 1 1 1 1
Deposit and Credit Guarantee Fund 1 1 1 1
Credit Information Center Limited(CICL) 1 1 1 1
Total 327 307 321 313
* NRB Licensed cooperatives: Dismissed from August 2018.
** NRB Licensed FINGOs (with limited banking activities): Licensed under
Microfinance
$ BFIs repeated as ASBA BFIs and Depository Participants not included in Total.
+ including 1 problematic
++ including 4 problematic

12
 Financial System Performance and Stability

Table 2.2: Structure of the Nepalese Financial Sector

(Assets/ Liabilities or Sources/Uses)
(Amount In
Mid-July
Financial Institutions Billion Rupees)
2015 2016 2017 2018 2019
Commercial Banks 1,774.50 2,184.81 2,621.23 3,104.27 3687.33
Development Banks 300.64 350.84 305.07 374.70 486.31
Finance Companies 108.00 103.44 82.60 96.01 112.54
MFIs 70.88 100.77 133.91 175.61 273.02
Cooperatives 265.55 385.72 396.53 388.13 491.93*
Contractual Saving Institutions
Employees Provident Fund 195.90 224.85 251.28 292.16 346.64
Citizen Investment Trust 67.67 83.01 99.10 114.06 148.90
Insurance Companies 129.45 158.24 185.89 260.31 347.15
Reinsurance Company 6.15 6.26 6.85 10.04 12.14
Mutual Fund - - 9.75 12.95 15.64
Total 2,918.77 3,597.96 4,092.10 4,828.25 5921.59
Market capitalization
989.40 1,889.45 1,856.82 1,435.13 1567.5
(NEPSE)
Total (incl. market
capitalization) 2,918.77 5,487.40 5,952.09 6,263.39 7488.95
Percentage Share (Excluding NEPSE Market Capitalization)
Financial Institutions
Commercial Banks 60.80 60.72 64.00 64.29 62.26
Development Banks 10.30 9.75 7.45 7.76 8.21
Finance Companies 3.70 2.88 2.02 1.99 1.90
MFIs 2.43 2.80 3.27 3.64 4.61
Cooperatives 9.10 10.72 9.68 8.04 8.30
Contractual Saving Institutions
Employees Provident Fund 6.71 6.25 6.14 6.05 5.85
Citizen Investment Trust 2.32 2.31 2.42 2.36 2.51
Insurance Companies 4.44 4.40 4.54 5.39 5.86
Reinsurance Company 0.21 0.17 0.24 0.21 0.20
Mutual Fund - - 0.24 0.27 0.26
Total 100.00 100.00 100.00 100.00 100
*Based on first 8 Month’s data of FY 2018/19
The share of BFIs in total assets and liabilities of the financial system stood at 79.06
percent in mid-July 2019 compared to 77.68 percent in the previous fiscal year. The

13
Financial System Performance and Stability

commercial banks remained the key Figure 2.1: Structure of Assets Holding in
Financial System
player in the financial system occupying
62.26 percent of the system’s total
assets followed by development banks
(8.21 percent), finance companies (1.90
percent) and microfinance financial
institutions (4.61 percent). These figure
stood at 64.29 percent, 7.76 percent,
1.99 percent 3.64 respectively.
In case of contractual saving
institutions, insurance companies are CBs CIT COOPs
a dominant institution having 5.86 DBs
Ics
EPF
MF
FCs
MFfIs

percent share, followed by EPF (5.85

percent), CIT (2.51 percent), and Figure 2.2: Total Assets and Assets to GDP Ratio
Reinsurance Company (0.20 percent) 6,400

6,000
Total Assets
Assets to GDP Ratio
172

168

as of mid-July 2019. The share of 5,600 164

cooperatives in total financial system 5,200 160

In billion rupees

Percentage
4,800 156

stood at 8.30 percent in mid- July 2019 4,400 152

compared to 8.04 in mid-July 2018. 4,000

3,600
148

144

These figure stood at 6.05 percent, 5.39 3,200 140

percent, 2.36 percent and 0.21 percent. 2,800

2015 2016 2017 2018 2019
136

Fiscal year ending mid-July

Figure 2.2 depicts the size of Nepalese

financial system. The ratio of total assets of the financial system to GDP, which
has been continually rising, reached 170.93 percent in mid-July 2019. Total assets
and liabilities of commercial banks remained at 106.43 percent of GDP followed
by development banks (14.03 percent), finance companies (3.24 percent), MFIs
(7.88 percent) and Cooperatives (14.19 percent). Further, such ratio for contractual
saving institutions stood at 25.12 percent comprising 10.06 percent of EPF, 4.29
percent of CIT, 10.02 percent of insurance companies, 0.34 percent of Reinsurance
Company and 0.45 percent of mutual fund in mid-July 2019.

2.2.2 Structure and Performance of Banks and Financial Institutions

The Nepalese banking system has changed significantly, both in terms of number
and structure, since 1985. Along with the financial liberalization, the number of
BFIs peaked in 2011 to 218 from only 3 in 1985. While the global financial system
was ridden with a crisis, new financial institutions were rapidly emerging in Nepal

14
 Financial System Performance and Stability

which underlined that Nepalese Figure 2.3: Number and Growth

of BFIs Licenced By NRB
economy is less exposed to international
280 0

financial markets. Nonetheless, efforts

240 -2

200 -4
were made to consolidate so that the 160 -6

Number
banking sector can be more resilient to

Percent
120 -8

any unfavorable changes and hence the 80 -10

number for BFIs has been decreasing. 40 -12

The decreasing trend is primarily 0 -14

attributed to the mergers and

2015 2016 2017 2018 2019
Fiscal year ending mid-July

acquisitions. The growth of “D”- class

"A" Class
"B" Class
"C" Class

institutions in the FY2018/19 is the

"D" Class
Limited Banking  Cooperative
NGOs

result of transforming NRB licensed Growth

FINGOs to “D” class institutions.

2.2.3 Growth of Assets in the Banking System

Total assets and liabilities of BFIs have Figure 2.4
continued to increase. As of mid-July Total Assets in Banking System

2019, total assets of BFIs increased

4,800 21
Growth Rate

by 19.89 percent to NPR 4,286.19 4,400 Total Assets 20

billion, compared to NPR 3,574.90 4,000 19

Amount In billion rupees

billion a year ago. Though restrictions 3,600 18

Percentage
have been placed on the licensing of 3,200 17

new BFIs, there has been significant 2,800 16

expansion of the balance sheet of BFIs 2,400 15
mainly due to the increase in deposits
and credits. Increase in deposits is
2,000 14

mainly driven by increase in banking 1,600

2015 2016 2017 2018 2019
13

habits, expansion in banking outreach, Fiscal year ending mid-July

supported by the wider adoption of information technology, and remittance inflows.

The liabilities side of the balance sheet has grown on account of the increase in paid
up capital and reserves through issuance of right shares, bonus share and increase
in profit. Similarly, the government has injected a significant capital in the state-
owned banks.
As of mid-July 2019, the five large commercial banks namely RBB, NICA, NIBL,
NABIL and EBL collectively accounted for 24.73 percent of total banking system
assets and 28.74 percent of total commercial banks’ assets. As of mid-July 2019,
the five large commercial banks i.e RBB, NICA, NIBL, NABIL and EBL had total

15
Financial System Performance and Stability

assets size of NPR 260.96 billion, NPR 222.86 billion, NPR 202.99 billion, NPR
194.98 billion, and NPR 178.19 billion respectively. This implies a concentration
of banking assets to few banks in Nepal. The failure of any of these large banks is,
therefore, likely to have a significant impact on the financial stability of Nepal.

2.2.4 Sectoral Credit Distribution by the Banking Sector

A large part of BFIs lending
Table 2.3: Credit Distribution in the Banking
is concentrated in eight key
System(as of mid-July, 2019)
areas of economic activities.
Of the total credit outstanding, Sector Percent
as of mid-July 2019, trade Agricultural and Forest Related 5.42
(wholesaler & retailer) Fishery Related 0.14
accounted for 21.13 percent,
Mining Related 0.25
followed by agriculture,
forestry and beverage Agriculture, Forestry & Bevarage
17.52
Production Related
production related (17.52
percent), other services (13.96 Construction 10.63
percent), construction (10.63 Electricity, Gas and Water 4.35
per cent), finance, insurance Metal Products, Machinary
and real estate (8.03 percent), & Electronic Equipment & 1.27
consumption (5.63 percent), Assemblage
agricultural and forest related Transport, Communication and
(5.42 percent), and Electricity, 3.2
Public Utilities
Gas and Water (4.35 percent). Wholesaler & Retailer 21.13
Concentration of lending to Finance, Insurance and Real Estate 8.03
a few sectors would expose
Hotel or Restaurant 4.19
banks to credit concentration
risk. Though NRB has made Other Services 4.22
mandatory provision of lending Consumption Loans 5.63
to priority sector to support Local Government 0.05
economy ,BFIs have not been
Others 13.96
able to lend to the priority
sector as per expectations. TOTAL 100

As per the product-wise

portfolio, BFIs have made highest lending in demand and working capital loan
(21.15 percent) followed by term loan (19.32 percent) and overdraft (15.65 percent).
The real estate loan has come below the regulatory requirement of 10 percent,
16
 Financial System Performance and Stability

standing at 5.05 percent in mid- July, 2019. Figure 2.5 depicts the product-wise
lending of BFIs as of mid-July 2019.
Figure 2.5: Product wise lending of BFIs

Bills Purchased
Margin Nature Loan
Trust Receipt
Real Estate Loan
Loan Product

Deprived Sector Loan

Hire Purchase Loan
Res. Per. H. Loan (Up to Rs. 10 m il.)
Other Product
Overdraft
Term Loan
Demand & Other Working Capital Loan

0 2 4 6 8 10 12 14 16 18 20 22

Percentage

2.2.5 Real Estate Lending

NRB has deployed some macro prudential measures to address real estate lending
such as caps on real estate loans, loan-to-value ratio, and sectoral capital requirements.
NRB has directed BFIs to limit their real estate and housing loan exposure to 25
percent of their total loans. The BFIs are also required not to issue loans exceeding
50 percent of fair market value of the collateral/project outside Kathmandu valley
and 40 percent inside Kathmandu valley. The maximum loan-to-value (LTV) ratio for
residential housing loan is 50 percent for Kathmandu valley and 60 percent for places
Figure 2.6 : Real Estate Exposure of BFIs
200,000
Real Estate Loan
Resendital Personal Home Loan

160,000
In Million Rupees

120,000

80,000

40,000

0
Class"A"

Class "B"

Class "C"

Class "A"

Class "B"

Class "C"

Class "A"

Class"B"

Class "C"

Class "A"

Class "B"

Class "C"

Class "A"

Class "B"

Class "C"
Overall

Overall

Overall

Overall

Overall

2015 2016 2017 2018 2019

17
Financial System Performance and Stability

outside Kathmandu valley. As for the real estate sector (which does not include the
housing sector), BFIs are to reduce their respective exposure to 10 percent. However,
NRB has granted some relaxation on residential home loan whereby BFIs can lend up
to NPR 15 million for personal residential home loan.

Figure 2.7: Loan Against Collateral of Fixed Assets

2,000,000

1,600,000
Amount in Million rupees

1,200,000

800,000

400,000

0
Class "A"

Class "B"

Class "C"

Class "A"

Class "B"

Class "C"

Class "A"

Class "B"

Class "C"

Class "A"

Class "B"

Class "C"
Overall

Overall

Overall

Overall
2016 2017 2018 2019

The banking system has reduced its high exposures in real estate after the
introduction of some additional macro prudential measures. The direct real estate
exposure amounted to NPR 146.99 billion which accounts for 5.86 percent of total
loan outstanding in mid-July 2019. Such exposure was about NPR 142.01 billion
(5.86 percent of the total outstanding loan) in mid-July 2018.
Commercial banks’ direct exposure to real estate and housing loan has declined from
19.40 percent in mid-July 2010 to 12.23 percent in mid-July 2019. Development
banks and finance companies have lent 18.37 percent and 23.31 percent, respectively
of their total loan portfolios to real estate and housing in mid-July 2019.
BFIs have lent 50.13 percent of their total loan against collateral of fixed assets.
Commercial banks have lent 73.78 percent and development banks and finance
companies have lent respectively 89.82 percent and 77.96 percent of their total loan
portfolio against collateral.

18
 Financial System Performance and Stability

2.3 Directed Lending

2.3.1 Productive Sector Lending
In order to facilitate the sustainable Figure 2.8: Productive Sector Lending of Commercial Banks

economic growth of the economy, NRB

35
Agriculture
Energy

has directed BFIs to lend certain percent 30 Tourism

Total

of their loan portfolio to the designated 25

productive sector of the economy. 20

Percent
Class “A” banks are required to lend 15

at least 25 percent of their total loan 10

to productive sector like agriculture, 5

energy, and tourism among which they 0

2015 2016 2017 2018 2019

are required to flow at least 10 percent Fiscal year ending mid-July

of their credit to the agriculture sector,

Figure: 2.9: Depriv ed Sector Lending of BFIs
15 percent to hydropower and tourism 9.0
(as of mid-July 2019)

sector. Likewise, class “B” and class

“C” BFIs are required to lend at least 15
8.5

percent and 10 percent, respectively, of 8.0

their total lending to productive sectors.

Percentage

7.5

The objective of this policy is to ensure 7.0

the availability of adequate funding for
6.5
sectors like agriculture, hydropower and
tourism which are the key drivers of 6.0

economic growth. 5.5

Class-"A"Class-"B"Class-"C" Overall

The monetary stance of NRB is designed

to ensure the adequate credit for productive investments to support the attainment
of the government’s GDP growth target. As on mid-July 2019, commercial banks
had provided 30.25 percent of their total loan to priority sector which comprises
11.89 percent in agriculture, 12.73 percent in hydropower and energy sector and
6.14 percent in tourism sector. Commercial banks have maintained the regulatory
provision of a minimum 10 percent to the agriculture sector and 15 percent for
energy and tourism sector.

2.3.2 Deprived Sector Lending

BFIs are required to disburse certain percent of their total loan portfolio to the
deprived sector as stipulated by NRB. With the objective of gradual expansion of
financial access to the deprived sectors of the economy, NRB has fixed such lending
19
Financial System Performance and Stability

requirement rate at 5 percent for class “A”,“B” and “C”. The overall deprived sector
lending by BFIs as of mid-July 2019 remained 6.09 percent whereas commercial
banks, development banks and finance companies have lent 5.69 percent, 8.85
percent and 6.91 percent, respectively.

2.4 Liability Structure of the Banking Sector

Deposits are the largest source of external Figure 2.10: Liability Structure of BFIs
funds in the banking sector. The share
of total deposits is 78.26 percent of the
total liabilities, as of mid-July 2019. As
of mid-July 2019, total deposit increased
by 18.0 percent compared to 19.2 percent
in mid-July 2018. Likewise, capital Borrowings

fund increased by 20.64 percent, mainly

Bills Payable
Deposits

due to capital increment plan of NRB,

Other Liabilities
Profit and Loss a/c

borrowings increased by 155.91 percent,

Reconciliation A/C
Capital Fund

whereas other liabilities increased by

19.89 percent in mid-July 2019. Figure 2.11: Deposit Liabilities by Type of Account

The share of saving deposits, fixed

deposits, call deposits, current deposit
and other deposit in mid-July 2019 stood
at31.62 percent, 45.51 percent, 12.44
percent, 9.29 percent and 1.15 percent,
respectively. The relative proportions Call Deposit

of such deposits in mid- July 2018 were

Current Deposit
Fixed Deposit

33.38 percent, 43.35 percent, 12.96

Other Deposit
Saving Deposit

percent, 9.05 percent and 1.26 percent

respectively. The slight change in deposit structure is mainly driven by the increase
in deposit rates following the liquidity tightness in the financial sector during the
review period.
The total deposits of BFIs increased to NPR 3,354.42 billion in mid-July 2019
from NPR 2,836.90 billion a year ago. The share of top five BFIs stands at 28.42
percent of the total deposits, of the banking system, depicting a significant
concentration of deposits in these institutions. Such a concentration ratio of
deposit was 25.08 percent in the previous year. Among top five banks, one is
state owned bank.

20
 Financial System Performance and Stability

2.5 Financial Soundness Indicators

2.5.1 Capital Adequacy
In mid–July 2019, the capital fund of Figure 2.12: Capital Adequacy Ratios of BFIs
BFIs increased by 20.64 percent, to NPR 24
Mid-July 2015
446.40 billion from NPR 370.01 billion in 22
Mid-July 2016
Mid-July 2017
mid–July 2018. Such increment was 19.88 20
Mid-July 2018
Mid-July 2019
percent in the previous year. The capital
fund is composed of paid-up capital (NPR
18

P e rc e n t
305.88 billion), statutory reserves (NPR 16

76.17 billion), retained earnings (NPR 14

4.53 billion) and other reserves (NPR 12

59.80 billion). In mid-July 2019, the
CAR of commercial banks was be 13.95
10
Class-"A" Class-"B" Class-"C" Overall

percent; while such CAR of development

banks and finance companies were 15.95 Figure 2.13: Core Capital and Overall Capital
Adequacy Ratio of Commercial Banks
percent 20.42 percent respectively. The 16 Mid-July 2015
overall CAR of BFIs in mid-July 2019 15 Mid-July 2017
Mid-July 2016

stood at 14.29 percent, little lower than Mid-July 2018

Mid-July 2019

15.15 percent in the previous year. The 14

Percentage

excess of capital adequacy ratio over the 13

minimum requirement of banking system 12
was mainly due to the consolidation
among development banks and finance
11

companies through merger and acquisition 10 Core Capital Ratio Overall CAR
as well as the capital increment decision
of NRB. The overall CAR of BFIs remained well above the standard requirements
set by NRB which indicates that the banking system’s capital soundness is in strong
position.
In mid-July 2019, commercial banks’ compliance with the minimum Capital
Adequacy Ratio (CAR) remained 100 percent. As evident from Figure 2.12, all
banks have complied with the minimum CAR in mid-July 2019. During the period
of 2011-2014, only two state owned banks (SOBs), Nepal Bank Limited (NBL) and
Rastriya Banijya Bank (RBB) were non-compliant to regulatory CAR. With the
injection of capital, RBB met capital adequacy ratio in mid-July 2015 with Tier1
capital of 9.9 percent and CAR ratio of 10.3 percent.

21
Financial System Performance and Stability

The analysis so far suggest that, over the period of mid-July of 2014-2019 the
capital adequacy ratios of commercial banks are higher than regulatory standard.
For instance, overall CAR of the commercial banks in mid-July 2019 is 13.95
percent compared to 10.6 percent in mid-July 2011.

2.5.2 Assets Quality

NPL of BFIs increased from NPR 38.51 Figure 2.14: Non Performing Loans of BFIs

million in mid-July 2018 to NPR 44.18

16
Class-"A"
Class-"B"
billion in mid-July 2019. In terms of ratio
14
Class-"C"
Overall
of NPL to total loans, the banking sector
12

showed improvement in assets quality and 10

P erce n t
sufficient provisions during the period of 8

2012-2019 indicating the banking sector’s 6

resilience toward vulnerable risk assets. 4

NPL to total loans of BFIs decreased by 2

0.08 percentage points to 1.52 percent in 0

2015 2016 2017 2018 2019
mid-July 2019; compared to1.60 percent a Fiscal year ending mid-July

year ago. NPL to total loans of commercial Figure 2.15: Provision Versus Actual Loan Loss

banks increased by 0.01 percentage point 16

LLP/TL
NPL/TL

on y-o-y basis to stand at 1.40 percent in

14

12

mid-July 2019. 10
Percent

None of the commercial banks have NPL 6

above 5.00 percent in mid-July 2019. 4

Likewise, NPL ratio of development banks 2

decreased by 0.17 percentage points to

0
Class-"A"
Class-"B"
Class-"C"

Class-"A"
Class-"B"
Class-"C"

Class-"A"
Class-"B"
Class-"C"

Class-"A"
Class-"B"
Class-"C"

Class-"A"
Class-"B"
Class-"C"
Overall

Overall

Overall

Overall

0.92 percent in mid-July 2019 as compared Overall

2015 2016 2017 2018 2019

to 1.09 percent in mid-July 2018. The NPL Fiscal year ending mid-July

ratio of finance companies have come

Figure 2.16 : Non Performing Loan Composition of BFIs
down to 8.80 percent in mid-July 2019
which was in double digits at 10.83 percent
in mid-July 2018. In mid- July 2019, BFIs
watchlist provision to total loan remains
at 0.06 percent. As of mid-July 2019, loan
loss provision (LLP) of banking system Doubtful

amounting NPR 63.21 billion is sufficient Loss

Restructured/Rescheduled

to cover the outstanding NPL.

Sub-Standard

22
 Financial System Performance and Stability

In the banking system, the bad loan, in Figure 2.17: Trends in Credit Growth
40
loss category amounted NPR 26.25 billion
in mid-July 2019 compared to NPR 23.04 30

billion in mid-July 2018. The ratio of such 20

Percentage
loans to NPL increased to 69.88 percent in 10

mid-July 2019 from 59.83 percent a year 0

ago. This reflects the deterioration in assets Commercial Banks

-10 Development Banks
quality of the banking system. However, it Finance Company
Overall

is a matter of concern that a bulk of NPL is -20

2015 2016 2017 2018 2019

in loss category.
Fiscal year ending mid-July

The NPL under sub-standard and doubtful categories constituted 21.25 percent and
17.06 percent respectively in mid-July 2019. The ratio of restructured/rescheduled
loans to total NPL remained around 2.27 percent in FY 2018/19.

2.5.3 Leverage Ratio

Basel Committee on Banking Supervision 40
Figure 2.18: Trends in Deposit Growth

has introduced leverage ratio which is

complementary to the risk-based capital
30

framework and aims to restrict the build- 20

Percentage

up of excessive leverage in the banking 10

sector. Basel III has set a minimum 0

leverage ratio of 3.0 percent at all times -10

Commercial Banks
Development Banks

whereas NRB has set a minimum leverage

Finance Company
Overall
-20

ratio of 4.0 percent at all times. 2015 2016 2017

Fiscal year ending mid-July
2018 2019

2.5.4 Credit and Deposit Growth

Credit flows from BFIs increased by Figure 2.19: Credit ,Deposit and C/D Ratio of BFIs

20.18 percent in mid-July, 2019 compared

3,600,000 88

to 21.47 percent credit growth a year ago. 3,200,000 86

The increase in credit growth rate was

In million rupees

2,800,000 84

mainly due to increase in source of funds

Percent

2,400,000 82
of BFIs on the one hand and increase in
credit demand as a result of improvements 2,000,000 80

in investment climate, on the other. 1,600,000 78

The trend of credit growth and deposit 1,200,000

2015 2016 2017 2018 2019
76

growth of “A”, “B” and “C” class C/D Ratio Credit Deposit

23
Financial System Performance and Stability

financial institutions is presented in

Figure 2.17 and Figure 2.18, respectively. Figure 2.20: Credit, Deposit with GDP ratio and
saving deposit ratio of BFIs
The figure shows sharp decline in credit 100

and deposit growth rate in Mid-July

80
2017 for development banks and finance
companies, whereas the credit and 60

deposit growth in commercial banks and

P erc ent
overall system shows only slight decline. 40

This is due to merger and acquisition

of development banks and finance
20

companies into commercial banks. Credit 0

of commercial banks, development Class-"A" Class-"B"

Saving Deposit/Total Deposit
Class-"C" Overall

banks, and finance companies grew Total Credit /GDP

Total Credit/Total Deposit
by18.25 percent, 36.29 percent and 19.86 Total Deposit/GDP

percent, respectively, in mid- July, 2019.

Figure 2.21: Class wise Profitability of BFIs

Deposits of BFIs increased by 18.24

32
Return on Assets
Return on Equity
28

percent in mid-July 2019 as compared 24

to 18.96 percent in mid-July 2018. 20

The deposit growth of commercial

Percent

16

banks, development banks and finance 12

companies registered 16.53 percent, 8

31.96 percent and 19.56 percent

4

respectively, in mid-July 2019.

0
Class-"A"

Class-"B"

Class-"C"

Class-"A"

Class-"B"

Class-"C"

Class-"A"

Class-"B"

Class-"C"

Class-"A"

Class-"B"

Class-"C"

Class-"A"

Class-"B"

Class-"C"
There has been increment in overall
credit to deposit ratio to 86.81 percent
in mid-July 2019 from 85.41 in mid-July
Figure 2.22: Ne t Profit (in Billion), ROE, ROA and
intere st M argin to Gross Income (In Pe rce nt)

2018. Such ratio was 90.45 percent for 80 90

of finance companies, 86.65 percent for 75 80

development banks, and 86.73 percent

70 70

65 60
In billion rupees

for commercial banks.

Percent

60 50

As of mid-July 2019, the ratio of total 55 40

deposit to GDP reached 96.83 percent. The

50 30

45 20
share of commercial banks, development 40 10
banks and finance companies in total 35 0

deposits stood at 85.85 percent, 11.87 2015 2016 2017 2018 2019

percent and 2.26 percent respectively. Interest Margin to Gross Income

Net Profit
Return on Assets
Likewise, the ratio of total credit to GDP Return On Equity

24
 Financial System Performance and Stability

reached 84.11 percent. The share of commercial banks, development banks and
finance companies in total credit stood at 85.78 percent, 11.85 percent and 2.36
percent, respectively.

2.5.5 Profitability
The overall growth rate of profitability Figure 2.23: Income Distribution of BFIs
100
of banking sector has increased in the
review period. The overall profitability of 80

banking sector has increased appreciably

60
by 21.01 percent in mid–July 2019 and

Percent
reached NPR 74.23 billion from NPR 40

61.34 billion in mid-July 2018.The 20

growth rate of profitability of banking
sector in the last year was 12.20 percent. 0
Class-"A" Class-"B" Class-"C" Overall
The commercial banks posted the highest Commission and Discount
Income From Exchange Fulctuation
share of profitability of the banking sector Interest Income
Other Income

accounting 87.85 percent of the total in

mid-July 2019.The Return on Equity (ROE) of commercial banks have fallen in FY
2018/19 mainly due to increase in capital. The ROE of commercial banks stood at
16.92 percent whereas those of development banks and finance companies stood at
15.14 percent and 13.27 percent respectively. Such ratio was 17.07 percent, 14.14
percent and 12.54 percent, respectively in the previous year.
The interest margin to gross income Figure: 2.24 Liquidity in BFIs

stood at 86.25 percent in mid-July 2019

90
2015
80 2016

which was 82.49 percent in mid-July

2017
2018
70 2019

2018. The net profit of BFIs grew by 60

24.23 percent in mid-July 2019 from

Percent

50

the growth of 12.20 percent in mid-July 40

2018. ROA increased slightly to 1.73

30

percent from 1.72 percent; whereas ROE

20

10

decreased to 16.62 percent in mid-July C/D Ratio liquid assets/total depositsliquid assets by total assets
Fiscal year ending mid-July

2019, from 17.58 percent in mid-July

2018. Interest income comprised the biggest share, 86.26 percent, in total income
of BFIs in FY2018/19. Of the total interest income, interest on loan and advance
constituted 93.26 percent and interest on call accounts constituted 5.92 percent.
Commission based income contributed only 4.48 percent to the total income. The
banking sector, thus, is still highly dependent on traditional activities of lending

25
Financial System Performance and Stability

and deposit mobilization. The gain from exchange fluctuation was 2.52 percent and
other income was 9.26 percent of the total income of BFIs in FY2018/19.

2.5.6 Liquidity
Fluctuations in the amount of liquidity have been a frequent occurrence in Nepali
financial sector due mainly to mismatch in the growth rate of credit relative to
deposit mobilization. With an increase in the paid-up capital, banks have been
aggressively lending to maintain their profitability. However, they have not been
able to generate adequate loanable fund following the sluggish growth of remittances
and weak expenditure capacity of the government. NRB has been using credit to
deposit (CD) ratio, net liquid assets to total deposits, and liquid assets to total assets
as gross measures to monitor the liquidity condition in the banking system.
Total liquid asset to deposit ratio of BFIs stood at 25.06 percent in mid-July 2019
compared to 25.91 percent in mid-July 2018. The total liquid asset to deposit ratios
for “A”, “B” and “C” class institutions was 24.41 percent, 27.57 percent and 36.27
percent, respectively, in mid-July 2019.Such ratios were 24.85 percent, 32.35
percent and 36.74 percent respectively in mid-July 2018. Hence, the ratios for all
BFIs stood above the regulatory requirements thereby increasing the cost of fund
for BFIs.
Table 2.4: Financial Soundness Indicators of BFIs (in percent)
Class “A” Class “B” Class “C” Overall
Indicators Mid-July Mid-July Mid-July Mid-July
2018 2019 2018 2019 2018 2019 2018 2019
Credit and deposit related indicators
Total deposit/GDP 82.19 83.14 10.04 11.50 2.11 2.19 94.34 96.83
Total credit/GDP 70.24 72.17 8.42 9.96 1.91 1.98 80.57 84.11
Total credit/ Total deposit 85.47 86.81 83.9 86.94 90.22 90.45 85.41 86.87
LCY credit/LCY deposit and
77.07 76.77 72.78 76.92 77.88 72.73 76.81 76.68
core Capital
Fixed deposit/Total deposit 43.33 45.42 41.36 44.91 53.63 51.78 43.35 45.51
Saving deposit/Total deposit 32.84 31.30 38.05 33.98 32.27 31.31 33.38 31.62
Current deposit/Total deposit 10.08 10.47 2.41 2.37 0.44 0.70 9.05 9.29
Call Deposit /Total Deposit 12.48 11.69 18.08 18.67 7.02 8.20 12.96 12.44
Other Deposit/Total Deposit 1.26 1.11 0.09 0.07 6.65 8.01 1.26 1.14

26
 Financial System Performance and Stability

Assets quality related indicators

NPL/ Total loan 1.41 1.40 1.09 0.92 10.83 8.80 1.6 1.52
Total LLP/Total loan 2.09 2.05 1.73 1.59 11.35 9.49 2.27 2.17
Res. Per. H. Loan (Up to NPR
7.92 7.47 10.43 12.29 14.05 12.89 8.32 8.17
15 mil.)/Total Loan
Real estate exposure/Total
5.43 4,76 7.73 6.07 13.36 10.42 5.86 5.04
loan
Deprived sector loan/Total
5.94 6.07 9.47 10.14 5.46 7.81 6.28 6.56
loan
Cash and bank balance/Total
12.57 11.30 16.53 12.30 19.49 18.47 13.15 11.58
deposit
Investment in Gov. security/
11.57 12.33 2.54 3.83 3.7 5.08 10.43 11.16
Total deposit
Liquid assets/Total assets 19.78 17.19 26.06 22.61 24.32 24.49 20.56 19.61
Total liquid assets/Total
24.85 24.41 32.35 27.60 36.74 36.27 25.91 25.06
deposit
Net liquid assets/Total Deposit 23.49 27.47 32.1 26.30 34.9 31.46 24.66 22.35

Capital adequacy related indicators

Core capital/RWA ( percent) 13.32 12.38 17.93 14.86 19.78 19.50 13.89 11.58
Total capital/RWA ( percent) 14.61 13.95 18.99 15.59 20.65 20.42 15.15 14.29
Wt. Avg. interest rate on
6.49 6.60 4.69 4.93 - -
deposit

Wt. Avg. interest rate on credit 12.29 12.16 9.04 8.62 - -

2.5.7 Base Rate of BFIs

NRB introduced base rate for commercial banks in 2013 and for development
banks and finance companies in 2014 advising the BFIs not to lend, below the
base rate. The base rate system will also facilitate BFIs in setting their adjustable
interest rate as the cost of funds can act as an effective reference rate. BFIs are
required to publish their base rate monthly in their website and quarterly in national
daily newspaper for public knowledge. The introduction of base rate is believed
to enhance transparency in interest rate setting for different products; protect the
clients’ interest; promote the healthy competition and sustainability of BFIs; and
strengthen the monetary transmission mechanism. Industry average base rate stood
at 9.30 percent in the review period.

27
Financial System Performance and Stability

Figure 2.25: Base Rate of Commercial banks

Industry

RBB

SCBNL

NBL

NABIL

EBL

NIBL

HBL

PRABHU

Sanima

NIC

Global

NSBI

Sunrise

NMB

Janata

Mega

BOK

Prime

NBBL

NCC

Laxmi

MBL

Citizen

SBL

ADBNL

Kumari

CBL

Century

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%

Mid-July 2019 Mid-July 2018

2.5.8 Interest Rate Spread

Interest rate spread is one of the major indicators of reflecting the cost of financial
intermediation. The spread, at any given time, is generally a function of many
factors such as, expenses on deposits, the general level of competition in the banking

28
 Financial System Performance and Stability

sector, the extent of credit

risk, and the managerial
efficiency of the concerned
banks. NRB had directed
“A” class banks to bring
down their interest spread
rate within 4.5 percent
and “B” and “C” class
financial institutions within
5.00 percent by mid-July
2019. BFIs have also
been directed to publish
their interest spread on a
monthly basis. As evident
from the figure 2.26, the
overall interest spread of the
commercial banks stood at
4.39 percent whereas, the
interest spread of the state-
owned banks remained
higher at 4.53 percent as
of mid-July 2019. Mega
Bank Ltd. has registered
the highest interest rate
spread of 4.73 percent
among commercial banks
followed by Sunrise Bank
with interest rate spread of
4.72 percent. Citizen Bank
Ltd has the lowest interest
rate spread of 3.13 percent
in the same period (Figure
2.26).
All the state-owned banks
have the spread below
5.00 percent in mid-July
2019.

29
Financial System Performance and Stability

2.6 Banking Sector Consolidation: Merger & Acquisition

Consolidation is taken as one of the Figure 2.27: Deposit Rate, Lending Rate, Spread Rate

tools to enhance the capital base, achieve

and Base rate of commercial banks
18 5.8
Base Rate

operational efficiency and strengthen the

Deposit, lending and base rate in %

16 Deposit Rate 5.6
Interest rate Spread
14 Lending Rate 5.4
resilience of BFIs. Merger and acquisitions

Interest rate in spread %

12 5.2

are considered one of the effective 10 5.0

means of financial consolidation. NRB 8 4.8

believes, the synergies generated through 6 4.6

consolidation will enable BFIs to offer

4 4.4

2 4.2

a wider array of products to customers. 0 4.0

Diversifying the products offered, in turn,

2015 2016 2017 2018 2019
Fiscal year ending mid-July

will offer opportunities for customer to

diversify risks, thereby helping them to become more resilient.
To strengthen the health and competency of BFIs, NRB has given high priority
to merger between licensed financial institutions. It includes specific process of
merger with several incentives, regulatory relaxations and encouragement for
further consolidations. NRB, through consolidation among BFIs, has expected
to yield the benefits of becoming larger institutions, enhancing their capacity for
providing modern financial products, enhance strong corporate governance culture,
strengthen capital base, ability to introduce new products, maximize the adoption
of enhanced IT platforms, enhance economies of scale, lower the cost of funds and
ultimately build resilience to domestic and external shocks.
The number of BFIs opting for merger has been increasing after the introduction of
merger policy. As of mid-July 2019, total number of BFIs has shrunk from 171 to
a total of 43.

2.7 Financial Access and Inclusion

Access to finance is expected to enable the poor and low- income people to be
self-reliant and break away from the vicious cycle of poverty. Increasing financial
access and inclusion has been a focal point for all regulatory institutions in Nepal.
They have been operating through various programs aimed to increase financial
access and inclusion in the country. Nepal Financial Inclusion Portal was launched
on 30 September 2018. This portal provides information on the status and progress
of financial access and inclusion in Nepal.
2.7.1 Efforts of NRB in Expanding Financial Inclusion

30
 Financial System Performance and Stability

Recognizing the need and importance of inclusive growth, NRB in coordination

with the government of Nepal, has taken a number of policy measures to ensure
reliable and affordable financial services to the poor people in the country. NRB
has been endeavoring to extend financial access and inclusion through various
incentives directed towards banks and financial institutions. Financial policy of
establishing a branch of commercial banks in every local bodies, expanding the size
of deprived sector lending requirement for licensed BFIs, mandatory requirements
for them to invest certain percentage of their total credit in the priority sectors,
liberal branch opening policy in local municipality (except their center), special
refinance facility to cottage and small industries, interest free loan to extend bank
branches in all local levels, establishment of Rural Self Reliance Fund for subsidized
credit to the poor and marginalized population, directives on consumer protection,
simplified provision to extend financial services through branchless banking and
mobile banking services, and policy regarding financial literacy are some of the
policy measures adopted by NRB towards ensuring financial inclusion and inclusive
growth in the country. In this connection, Government of Nepal has also announced
a policy aiming at a bank account for every citizen.
In addition to these, NRB has also been taking initiatives on extending the reach of
financial literacy programs and financial consumer protection which is expected to
enhance the banking habits of the people.
Table 2.5: Number of Branches of BFIs
Number of Branches Share (in percent)
Financial Institutions Mid-July Mid-July Mid-July Mid-July
2018 2019 2018 2019
Commercial Banks 3,023 3,585 45.44 41.27
Development Banks 993 1,267 14.93 14.58
Finance Companies 186 205 2.80 2.36
MFIs 2,450 3,629 36.83 41.77
Total 6,652 8,686 100 100
Financial access has been increasing with the expansion of branch network of
financial institutions. As of mid-July 2019, the branch network of commercial
banks has reached 3585. This was followed by development banks (1267), Finance
companies (205) and Micro Finance Financial Institutions (3629). In mid-July
2018, the number of such branches of the respective categories of BFIs stood at
3,023, 993, 186 and 2,450, respectively. . With the direction of NRB to open at
least one commercial bank branch in the Municipal Government level, along with
the increase in branches of other BFIs, the total number of BFIs branches increased

31
Financial System Performance and Stability

by 2,034 (30.57 percent) to 8,686 in mid- Figure 2.28: Branches of BFIs

9,000 40
July 2019. Consequently, the number of 8,000 36

people per BFI branch (excluding MFIs) 7,000 32

came down from 6,652 in mid-July 2018 6,000 28

to 5, 776 in mid-July 2019. Including

Percent
5,000 24

4,000 20
MFIs (Class D FIs) per branch population 3,000 16

comes further down to 3363. 2,000 12

1,000 8
Increase in number of branches indicates 0 4

the increase in financial outreach or

2015 2016 2017 2018 2019
Class-"A" Class-"B"

financial access, which is also considered

Class-"C" Class-"D"
Growth Total

as one of the indicators of financial

inclusion. Despite the growth in number of BFIs and their branches, financial
service providers are still mainly concentrated in urban or semi- urban areas where
geographical access is relatively easy.
Table 2.6: Provincial Distribution of BFI Branches
Total Total Share Population (per
Province A B C D
(A+B+C) (A+B+C+D) (in %) branch)*
1 585 183 39 624 807 1,431 16.47 6,015
2 421 94 23 660 538 1,198 13.79 11,269
Bagmati 1,238 335 78 554 1,651 2,205 25.39 3,775
Gandaki 396 253 28 497 677 1,174 13.52 3,685
5 530 317 30 814 877 1,691 19.47 5,661
Karnali 159 20 4 168 183 351 4.04 9,593
Sudur
256 65 3 312 324 636
Paschim 7.32 8,783
Total 3,585 1,267 205 3,629 5,057 8,686    5,776
*Excluding D- class financial institutions Figure 2.29: Districts Having Highest Bank Branches

Looking upon the province-wise

Kathmandu

Rupandehi

distribution, the majority of BFIs branches Kaski

of BFIs are situated in is concentrated in Chitawan

Morang

Bagmati Province, totaling 1,651 (25.39 Jhapa

percent). The second biggest BFI branch Lalitpur

density is in Province No 5 with total of

Sunsari

Kailali

877 (19.47 percent). Dang

100 200 300 400 500 600 700 800

32
 Financial System Performance and Stability

Kathmandu is highly concentrated district Figure 2.30: Districts Having Least Bank Branches

in terms of number of BFIs presence, Bajhang

Mustang

followed by Rupandehi and Kaski. Kalikot

Despite continuous efforts from the NRB Jajarkot

Bajura
in increasing the outreach of financial Humla

services in remote areas, the result is Manang

still not satisfactory in terms of branch

Dolpa

Mugu

expansion in Karnali Province. Rukum Rukum East

East has only 5 BFIs branches while

4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Mugu has only 6 BFIs branches.

Investment in information technology (IT) based systems is vital to improve
banking efficiency and service delivery in this competitive age. The resulting
greater efficiency and outreach will help promote financial inclusion, reduce
intermediation costs thereby improving the bottom line of the financial services.
Table 2.7 demonstrates the status of electronic banking such as numbers of ATM
terminals, number of debit cards, credit cards along with the increase in number of
internet banking and mobile banking customers.
Table 2.7: Use of Financial Services
Particulars Class “A” Class “B” Class “C” Total
No. of Deposit Accounts 22,927,898 4,375,814 562793 27,866,505
No.of Loan Accounts 1,047,537 349,126 42985 1,439,648
No. of Branchless Banking Centers 1,529 1 0 1,530
No. of Branchless Banking Customers 168,164 143 0 168,307
No. of Mobile Banking Customers 7,406,802 909,512 30873 8,347,187
No. of Internet Banking Customers 888,268 24,124 4952 917,344
No. of ATMs 2,951 318 47 3,316
No. of Debit Cards 6,454,285 216,991 37245 6,708,521
No. of Credit Cards 123,146 0 0 123,146
No. of Prepaid Cards 67,386 0 0 67,386
Branchless banking has been developed to address the payment needs of people who
do not have access to the financial system. Branchless banking is a cheaper means
of banking system which can be operated in the remote districts whilst phone- based
payment systems have been introduced to enhance convenience in making payments
at merchandise outlets. In mid-July 2019, branchless banking centers numbered 1,530.
BFIs are encouraged to serve through branchless banking in remote areas

33
Financial System Performance and Stability

2.8 Performance and Reform of State Owned Banks (SOBs)

Nepal Bank Limited (NBL), Rastriya Figure 2.31
Share of SOBs in Total Assets of Commercial Banks
Banijya Bank (RBB) and Agriculture
Development Bank Limited (ADBL)
are the three state-owned commercial
banks, whose total assets and liabilities Others 85.75%

in mid-July 2019 was equivalent to 17.63 SOBs 14.25%

percent of that year’s GDP. The share of

total assets & liabilities of BFIs to GDP
reached to 123.724 percent in mid-July
2019. This reflects the progress achieved
in Nepal’s financial deepening. The total assets of state- owned banks (SOB)
increased from NPR 475.29 billion in mid-July 2018 to NPR 610.80 billion in mid-
July 2019. The total share of SOBs in total assets of commercial bank is 14.25
percent in mid-July 2019.
The state-owned commercial banks Figure 2.32
Paid up capital, Capital Fund and Deposits of SOB
represent 12.82 percent share in total 35
Capital Fund
Paid Up Capital
200

deposit of commercial banks. Their

30 Deposit 180

market share in terms of total assets, total

25 160
In billion rupees

20 140

Percent
deposit and loan & advances of all BFIs 15 120

stood at 14.25 percent, 12.82 percent and 10 100

12.21 percent, respectively, in mid-July 5 80

2019. Among these banks, financial and 0 60

RBB

RBB

RBB

RBB

RBB
NBL

NBL

NBL

NBL

NBL
ADBNL

ADBNL

ADBNL

ADBNL

ADBNL
regulatory position of ADBL, especially
in terms of capital base and capital adequacy remains at satisfactory level. The asset
quality of NBL and RBB has been gradually improving in the review period.
As of mid-July 2019, capital fund of Figure 2.33: Capital Adequacy of SOBs
NBL stood at NPR 23.43 billion, while 22
Core Capital/RWA

that of RBB and ADBL stood ats NPR

20 Total Capita/RW A

23.65 billion and NPR 24.46 billion

18

16

respectively. The corresponding capital

Percent

14

funds of these SOBs in mid-July 2018 12

were NPR 11.45 billion, 14.30 billion 10

and 21.78 billion, respectively. This 8

shows a significant improvement in the 6

RBB

RBB

RBB

RBB

RBB
NBL

NBL

NBL

NBL

NBL
ADBNL

ADBNL

ADBNL

ADBNL

ADBNL

capital base of these SOBs.

34
 Financial System Performance and Stability

The core capital-to-risk weighted assets 8

Figure 2.34: NPL and LLP Ratios of SOBs

and total capital-to-risk weighted assets LLP/TL

NPL/TL

of ADBL stood at 19.29 percent and 20.31

7

percent in mid-July 2019. Such capital 6

Percent
was 19.16 percent and 20.18 percent, 5

respectively, in mid-July 2018. Likewise, 4

reform of two SOBs led the improvement 3

in core capital and total capital. Both 2

RBB and NBL have already met the

RBB

RBB

RBB

RBB

RBB
NBL

NBL

NBL

NBL

NBL
ADBNL

ADBNL

ADBNL

ADBNL

ADBNL
minimum capital requirement. The core
capital and total capital-to-risk weighted assets of NBL stood at 16.59 percent and
17.41 percent, respectively. Similarly, core capital and total capital-to-risk weighted
assets of RBB stood at 12.01 percent and 13.19 percent respectively in mid-July
2019. Improvement in capital adequacy ratio of SOBs indicates improved resilience
(Figure 2.33).
The NPL ratio of state-owned banks has improved from 3.54 percent in mid-July
2018 to 3.38 percent in mid-July 2019. As on mid- July 2019, the NPL ratio of ADBL
was 3.67 percent, while RBB and NBL had NPL ratios of 3.90 percent and 2.58
percent respectively. This implies improvements in their asset quality. Such ratios
were 3.20 percent, 4.25 percent and 2.90 percent in mid-July 2018 (Figure 2.34).
The NPL ratio of all state-owned banks are found improving gradually. Though
there has been decrease in NPL of SOBs, NPL of majority of other commercial
banks have been increasing. Consequently, overall NPL of commercial banks has
worsened from 1.39 percent in 2018 mid-July to 2019 mid-July.

2.9 Infrastructure Development Bank

In the review period, Nepal Infrastructure Bank Limited (NIFRA) came into
operation with a paid up capital of NPR 12 billion, authorized capital of NPR 40
billion and issued capital of NPR 20 billion. Similarly, in the review period the bank
managed to collect fixed deposit of NPR 200 million from institutional depositors,
net profit was NPR 669.2 million while the Bank’s total assets stood at NPR 13.15
billion.

35
Performance of Financial Institutions

Chapter – III
Performance of Financial Institutions

3.1 Performance of Commercial Banks

Nepalese financial system comprises dominant share of BFIs. Moreover, among
the BFIs, commercial bank holds significant share in total assets (NPR 3687.33
billion as of mid-July 2019). In mid-July 2019, share of commercial banks in total
assets and liabilities of NRB regulated BFIs decreased to 80.87 percent from 83.42
percent in mid-July 2018. Similarly, ratio of total assets and liabilities of commercial
banks to GDP increased to 106.43 percent in mid-July 2019 from 103.23 percent
a year ago. The dominance of commercial banks in total banking sector in terms
of assets and liabilities as well as in terms of balance sheet component has broadly
remained stable. The total assets (or liabilities) of commercial banks increased by
18.78 percent to NPR 3687.33 billion in mid-July 2019 from NPR 3104.27 billion
in mid-July 2018.

3.1.1 Deposits and Credits

Total deposit and credit of commercial Figure 3.1: Deposit and credit trends of commercial banks
banks stood at 83.14 percent and 72.17 3,000
credit
percent of GDP, respectively, in mid- 2,800
Deposit

July 2019 compared to 82.20 percent 2,600

and 70.24 percent of GDP, respectively,

In billion rupees

2,400

in mid-July 2018. Total deposits grew 2,200

by 16.53 percent to NPR 2880.09
billion in FY2018/19 compared to a
2,000

growth of 18.07 percent in the previous 1,800

year. Total credit flow grew by 18.36 1,600

II III IV I II III IV I II III

percent and reached to NPR 2496.60 in 2017 2018 2019

mid-July 2019.
Fiscal year ending mid-July

Besides loans and advances, investment in government securities has emerged

as the second best option for commercial banks to utilize their excess liquidity.
Investment in government securities increased by 24.27 percent, on y-o-y basis, to
NPR 355.20 billion in mid-July 2019.

36
 Performance of Financial Institutions

3.1.2 Capital
The capital fund of commercial banks rose by 22.61 percent to NPR 385.24 billion in
mid-July 2019 from NPR 314.19 billion a year ago. Of the total capital fund, paid up
capital was NPR 252.26 billion and general reserves were 67.35 billion. Moreover,
in mid-July 2019, all the commercial banks have maintained the mandatory Capital
Adequacy Ratio. Total Capital fund to risk weighted exposure of commercial banks
has decreased to 13.96 percent in mid- July 2019 from 14.61 percent in mid-July
2018 (Table 3.1).

3.1.3 Assets
The aggregate NPL to total loan ratio of commercial banks decreased to 1.43
percent in mid-July 2019 from 1.39 percent in mid-July 2018. The three state-owned
banks in total have a combined NPL ratio of 3.47 percent whereas that of private
commercial banks is 1.09 percent in mid-July 2019. As of mid-July 2018, average
NPL ratio of three state owned commercial banks was 3.54 percent, whereas such
a ratio for private commercial banks was 1.03 percent. Credit quality of both state-
owned commercial banks and private commercial banks on aggregate has slightly
improved.

Table 3.1: Major Financial Indicators of Commercial Banks

(Ratio in Percentage)
Indicators mid-July 2018 mid-July 2019
Tier 1 & Tier 2 Capital /RWE 14.61 13.96
Tier 1 Capital/RWE 13.32 12.39
NPL/Total Loan 1.39 1.43
Return on Equity 17.07 17.18
Net Interest Spread 3.85 4.09
Total Credit to Total Deposit 85.47 86.77
Total Liquid Assets/Total Deposit 26.2 24.31
Base Rate 9.77 8.93

The existing regulatory provision requires commercial banks to invest at least 25

percent of total loan and advances in agriculture, hydropower/energy and tourism
sector. The total loans of commercial banks in agriculture and hydropower/energy
and tourism sector accounts for 11.89 percent and 18.36 percent, respectively.

37
Performance of Financial Institutions

The regulatory requirement for agriculture sector is 10 percent while for energy
(hydropower) and tourism sector is 15 percent which has been fully complied.
Product-wise loan comparison with the previous year reveals that commercial
banks were less motivated to invest in real estate lending and margin nature loan
as they represented 4.7 6percent and 1.72 percent, respectively, of the total loan
in mid-July 2019. Similarly, product wise loans in terms of term loan, overdraft
loan, demand and other working capital loan and hire purchase loan represent
19.08 percent, 15 percent, 23.96 percent and 5.68 percent respectively, of the
total loan in mid-July 2019. Such ratios were 17.46 percent, 16.53 percent, 22.74
percent and 6.50 percent, respectively, in mid-July 2018. There was noticeable
growth in term, demand and working capital loan and slight dip in hire purchase
loan, which shows that banking sector, especially CBs, still prefer such loans
(retail lending) as lucrative for short term profitability and performance. As of
mid-July 2019, commercial banks have disbursed 5.69 percent of their total loan
in the deprived sector. Loan against properties have shown increasing trend in
the review period. Out of total loan, a significantly higher proportion of 89.53
percent are backed by collateral of properties in mid-July 2019 compared to
61.70 percent a year ago.

3.1.4 Profitability
Compared to a modest growth of 16.26 percent in the previous year, net profit
of the commercial banks increased significantly by 22.47 percent to NPR 64.45
billion in FY 2018/19. All commercial banks registered positive profit during
the review period. Contribution of interest income was 85.76 percent of the
total income in the review period, a decent increase from 83.82 percent in the
previous year.

3.2 Stress Testing of Commercial Banks

3.2.1 Credit Shock
Stress testing results based on data of mid-July 2019 obtained from 28 commercial
banks revealed that a combined credit shock of 15 percent of performing loans
degraded to substandard, 15 percent of substandard loans deteriorated to doubtful
loans, 25 percent of doubtful loans degraded to loss loans, and 5 percent of performing
loans deteriorated to loss loans categories would push down the aftershock capital
adequacy ratio of 24 commercial banks below the minimum regulatory requirements
(including conservation buffer) of 11 percent. The numbers of such banks were 24

38
 Performance of Financial Institutions

in mid-July 2018 also. Four commercial banks have complied with the regulatory
requirement of CAR after shock i.e. 11 percent.
However, another scenario of 25 percent of performing loans of real estate and
housing sector directly downgraded to loss loans showed some respite. Under
this scenario, capital adequacy ratio of 3 commercial banks will come below
the required level of 11 percent. In mid-July 2018 only 2 banks belonged to this
category. The result showed that majority of commercial banks maintained their
resilience towards real estate sector during the fiscal year.
In another credit shock test, under the scenario of top two large exposures (loans)
downgraded from performing to substandard category, the capital adequacy ratio of
1 commercial bank would fall below the required level whereas the number of such
commercial banks was 3 in mid-July 2018. This scenario shows that there is slight
improvement in the performance due to loan diversification and less dependency on
top two borrower’s exposure. The overall credit shock scenario revealed that banks’
credit quality has been improving as per the expectation due to various measures
taken during the review period.

3.2.2 Liquidity Shock

The stress test under scenario of withdrawal of deposits by customers by 2, 5, 10, 10
and 10 percent for five consecutive days showed that 24 out of 28 commercial banks
are vulnerable towards liquidity crisis. Eight banks were prone to liquidity shock of
withdrawal of 5 percent of deposits in a single day, while 17 banks’ liquidity ratio
would drop below 20.00 percent after withdrawal of 10 percent deposit in a single
day. The number of banks seeing their liquidity ratio drop below 20 percent would
grow to 26 if the single day deposit withdrawal increased to 15 percent. In mid-
July 2018, the numbers of banks prone to liquidity shock under single day deposit
withdrawal of 5, 10 or 15 percent were 8, 21 and 24, respectively.
With the shock of withdrawal of deposits by top 2, 3 or 5 institutional
depositors, liquid assets to deposit ratio of 13, 19 and 23 commercial banks
would be below 20 percent in mid-July 2019. The numbers were 18, 22 and
22 in mid-July 2018. However, 11 of the commercial banks were vulnerable in
case of deposit withdrawals from top 2, 3 individual depositors, respectively,
and 1 commercials bank was vulnerable among all commercial banks in case of
deposit withdrawals from top 5 individual depositors. Four commercial banks
were vulnerable in case of deposit withdrawals from top 5 individual depositors
in mid-July 2018.

39
Performance of Financial Institutions

3.2.3 Market and Combined Credit and Market Shock

The stress testing result under market shock revealed that 28 commercial banks
have maintained enough CAR to absorb the interest rate shock and maintain it
above the regulatory requirement. The interest rates were calibrated by changes
in deposit and credit interest rates from 1 percent to 2 percent. Similarly,
commercial banks were found to be safe from exchange rate risks as the net open
position to foreign currency was lower for all 28 of them. Furthermore, since
commercial banks have nominal equity investments, the impact of fluctuation
in equity price is near to zero. However, 2 commercial banks had fall in equity
prices by 50 percent.
When going through market shock, all commercial banks could maintain their
capital adequacy ratio above the regulatory requirement of 11 percent. T h e
banks did not bear interest rate risks as they pass it directly to their clients; so, they
are found to be less affected by interest rate shock as well.
The combined credit and market shocks based on a scenario of 25 percent of
performing loan of real estate and housing sector directly downgraded to substandard
category of NPLs and fall of the equity prices by 50 percent showed that CAR of 2
banks would fall below 11 percent. However, under a more adverse scenario of 15
percent of performing loans deteriorated to substandard, 15 percent of substandard
loans deteriorated to doubtful loans, 25 percent of doubtful loans deteriorated to
loss loans and the equity prices fall by 50 percent, the CAR of 10 banks would
remain above the regulatory minimum level and CAR of 18 banks would fall below
regulatory minimum of 11 percent.

3.3 Performance of Development Banks

Development banks have maintained buffers of capital and liquidity over current
regulatory requirements. They have also remained profitable and largely able to
withstand various shocks. There has been a significant increase in their deposits
and lending during FY2018/19. Increment in business volumes of the development
banks has led to increase in profit. Even though, the development banks have enough
capital and liquidity to withstand any unfavorable changes in economy, there still
seems to be a need for greater resilience among development banks to withstand
possible liquidity shocks.
There has been slight decrease in base rate and interest rate spread as compared to
the previous FY. Such decline was a reflection of the regulatory requirements and
the prevailing market conditions.
40
 Performance of Financial Institutions

Mergers and acquisitions continued during this fiscal year as well such that
the number of development banks has decreased from 33 a year ago to 29 in
2018/19.

3.3.1 Deposit and Credit

Total deposits increased by 31.91 percent to NPR 398.33 billion from NPR 301.97
billion during FY 2018/19 while gross loans increased by 36.30 percent to NPR
345.17 billion, from NPR 253.24 billion in 2017/18. However, these figures have
to be understood in the context of merger and acquisitions that took place during
FY 2018/19.
Credit to deposit ratio stood at 86.94 percent during FY 2018/19 while credit to
deposit and core capital ratio was76.68 percent during this period. Growth in
credit was more pronounced than the increase in deposits during the period which
contributed to the rise in credit to deposit ratio as well as credit to deposit and
core capital ratio. As of mid-July 2019, credit to deposit and core capital ratio
of national level and other development banks stood at 77.87 percent and 73.12
percent, respectively.

3.3.2 Assets
In 2018/19 total assets of development banks increased by 29.78 percent to NPR
486.31 billion from NPR 374.70 billion in 2017/18. The non-performing loans
which stood at NPR 3.16 billion as on mid-July 2019, accounted for 0.92 percent
of total loans. This means that non- performing loans as a percentage of total
loans decreased by 13 basis points during FY 2018/19. As of mid-July 2019, non-
performing loan percentage of national level and other development banks stood at
0.96 percent and 0.71 percent, respectively.

3.3.3 Capital
Core capital to risk weighted assets (RWA) figure declined from 22.73 percent as on
mid-July 2018 to 14.86 percent on mid-July 2019 while Capital fund to RWA figure
declined from 18.99 percent to 15.96 percent.
The regulatory requirement for FY2018/79 requires a minimum of 6 percent of tier
1 capital to RWE and a minimum 10 percent total capital fund to RWE for national
level development banks. Similarly, they require minimum 5.5 percent core capital
to RWA and minimum 11 percent capital fund to RWA for other development banks.
Therefore, development banks seem to be in a comfortable position with respect to

41
Performance of Financial Institutions

capital adequacy requirement.

The decrease in capital adequacy was largely driven by an increase in business
volume via credit growth. As on mid-July 2019, core capital to risk weighted
exposure (RWE) and risk weighted assets (RWA) ratio of national level and other
development banks stood at 14.47 percent and 16.29 percent respectively; while
capital fund to RWE and RWA ratio stood at 15.62 percent and 17.16 percent,
respectively.

3.3.4 Profitability
Total net profit of development banks increased by 17.69 percentage during FY
2018/19. However, these figures have to be understood in the context of M&As
which occurred during FY2018/19 during which 4 development banks were merged.
Table 3.2: Major Indicators of Development Banks

Ratios (in
Particulars
percent)
Core Capital to RWA (RWE in case of National Level) 14.47%
Capital Fund to RWA (RWE in case of National Level) 15.62%
Credit to Deposit (LCY) Ratio 86.94%
Credit to Deposit (LCY) & Core Capital 76.92%
Non-Performing Loan to Total Loan 0.92%
Liquid Assets to Total Deposits 27.60%
Weighted Average Interest on Credit 14.07%
Weighted Average Interest on Deposit 8.62%
Weighted Average Interest on Govt. Sec. 4.93%
Similarly, as on mid-July 2019, ROE and ROA of development banks stood at
13.27 percent and 1.51 percent, respectively. Of this, ROE of national level and
other development banks stood at 13.57 percent and 12.31 percent respectively
while their ROA stood at 1.46 percent and 1.72 percent, respectively.

3.3.5 Base Rates and Spread Rates

The average base rate of development banks decreased by 1.20 percentage points
to 11.22 percent during FY2018/19. Similarly, interest rate spread decreased from

42
 Performance of Financial Institutions

5.30 percent to 5.08 percent. This decrease in base rate is largely attributable to
the changes in regulatory requirements. As on mid-July 2019, average base rate
of national level and other development banks stood at 11.25 percent and 11.34
percent respectively, while the interest rate spread stood at 4.89 percent and 5.90
percent respectively.

3.4 Stress Testing of Development Banks

Stress test results indicate that national level development banks remain sound and
quite resilient to various kinds of shocks though greater resilience seems necessary
for liquidity shocks. Results indicate that national level development banks have
adequate buffer capital to absorb various shocks as detailed below (Table 3.3):

3.4.1 Credit Shock

Standard credit shock test results indicated that all national level development banks
would be able to withstand all except three among nine standard credit shocks to
which they were subjected in stress testing scenario. Only one out of eleven national
level development banks would not comply with the minimum capital adequacy
ratio requirement if 15 percent of performing loans deteriorated to substandard
loans,

3.4.2 Liquidity Shock

Standard liquidity shock test results suggested that few national level development
banks would fall below mandatory liquidity ratio in stress scenarios. Stress test results
indicate that seven national development banks would see its capital adequacy dip
below minimum level if there were a withdrawal of deposits by 2 percent, 5 percent,
10 percent, 10 percent and 10 percent per day for five consecutive days.
Similarly, none of the national level development banks were found to have their
liquid assets to deposit ratio fall below the regulatory minimum of 20 percent if top
individual depositors withdrew their deposits.

3.4.3 Other Shocks

All national level development banks were found to be resilient to standard interest
rate, exchange rate and equity price shocks such that none of the national level
development banks would have their capital adequacy ratio fall below the regulatory
minimum of 10 percent following these shocks.

43
Performance of Financial Institutions

Table 3.3: Summary Results of Stress Testing of National Level

Development Banks
As of Asar end, 2076
Number of Banks
with CAR
Events < 0% - >=10
0% <10% %

Pre Shock 0 0 11
Post Shocks
A. After Credit Shock < 0% 0% - >=10
<10% %
C1 15 Percent of Performing loans deteriorated to substandard 0 1 10
15 Percent of Substandard loans deteriorated to doubtful loans 0 0 11
25 Percent of Doubtful loans deteriorated to loss Loans 0 0 11
5 Percent of Performing loans deteriorated to loss Loans 0 2 9
C2 All NPLs under substandard category downgraded to doubtful. 0 0 11
All NPLs under doubtful category downgraded to loss. 0 0 11
C3 25 Percent of performing loan of Real Estate & Hosing sector
0 0 11
loan directly downgraded to substandard category of NPLs.
C4 25 Percent of performing loan of Real Estate & Hosing sector
0 1 10
loan directly downgraded to Loss category of NPLs.
C5 Top 5 Large exposures downgraded: Performing
0 0 11
to Substandard
B. After Market Shocks

(a) Interest Rate Shocks < 0% 0% - >=10

<10% %
IR-1a Deposits interest rate changed by 1.0 percent point on an average. 0 0 11
IR-1b Deposits interest rate changed by 1.5 percent point on an average. 0 0 11
IR-1c Deposits interest rate changed by 2.0 percent point on an average. 0 0 11
IR-2a Loan interest rate changed by -1.0 percent point on an average. 0 0 11
IR-2b Loan interest rate changed by -1.5 percent point on an average. 0 0 11
IR-2c Loan interest rate changed by -2.0 percent point on an average. 0 0 11
IR-3 Combine Shocks (IR-1a & IR-2a) 0 0 11
(b) Exchange Rate Shocks
ER- Depreciation of currency exchange rate by20%
0 0 11
1a

44
 Performance of Financial Institutions

ER- Appreciation of currency exchange rate by25%

0 0 11
1b
(c) Equity Price Shocks
EQ-1 Fall in the equity prices by 50% 0 0 11
C. After Liquidity Shocks

Events

L-1a Number of BFIs illiquid after on 1st day while

0
withdrawal of deposits by 2%
Number of BFIs illiquid after on 2nd day while
0
withdrawal of deposits by 5%
Number of BFIs illiquid after on 3rd day while
0
withdrawal of deposits by 10%
Number of BFIs illiquid after on 4th day while
0
withdrawal of deposits by 10%
Number of BFIs illiquid after on 5th day while
7
withdrawal of deposits by 10%
Number of Banks with Liquid Assets to Deposit Ratio < 0% - >=20
0% <20% %
Pre-shocks 0 0 11
After Shocks
L-2a Withdrawal of deposits by 5% 0 4 7
L-2b Withdrawal of deposits by 10% 0 10 1
L-2c Withdrawal of deposits by 15% 0 11 0
L-2d Withdrawal of deposits by 20% 0 11 0
L-3a Withdrawal of deposits by top 1 institutional depositors. 0 0 11
L-3b Withdrawal of deposits by top 2 institutional depositors. 0 2 9
L-3c Withdrawal of deposits by top 3 institutional depositors. 0 3 8
L-3d Withdrawal of deposits by top 4 institutional depositors. 0 5 6
L-3e Withdrawal of deposits by top 5 institutional depositors. 0 5 6
L-4a Withdrawal of deposits by top 1 individual depositors. 0 0 11
L-4b Withdrawal of deposits by top 2 individual depositors. 0 0 11
L-4c Withdrawal of deposits by top 3 individual depositors. 0 0 11
L-4d Withdrawal of deposits by top 4 individual depositors. 0 0 11
L-4e Withdrawal of deposits by top 5 individual depositors. 0 0 11

45
Performance of Financial Institutions

3.5 Performance of Finance companies1

Share of finance companies in the overall economic activity is smaller in comparison
to A and B class FIs, as shown by their low deposit to GDP ratio which stood at
2.19 percent in mid-July 2019. Such a ratio was 2.11 percent in mid-July 2018.The
total assets (or liabilities) of finance companies increased by 17.21 percent to NPR
112.54 billion in mid-July 2019 compared to mid-July 2018. Finance companies
mobilized aggregate deposit of NPR 75.99 billion in mid-July 2019, an increment
of 19.56 percent compared to mid-July 2018.
Loan and advances of finance companies stood at NPR 68.73 billion in mid-July
2019,which was 1.86 percent of GDP compared to 1.91 percent of GDP in mid-July
2018.The investment of finance companies increased to NPR 3.88 billion in mid-
July 2019 from NPR 2.35 billion a year ago. Investment in government securities
accounted for 63.18 percent whereas 33.50 percent of total investment was on share
investment. The rest was on other investment.
Capital fund of finance companies stood at NPR 13.22 billion in mid-July 2019
which is 19.45 percent of their risk weighted exposure. In mid-July 2018 such ratio
was 21.44 percent amounting to NPR 14.02 billion.
The credit to deposit and core capital ratio of finance companies registered 72.73
percent in mid-July 2019, which is below the prescribed limit of 80 percent.
Such a ratio was 77.80 percent in mid-July 2018.Total non-performing loan
of finance companies was 2.41 percent of total loan and advances in mid-July
2019 compared to 2.91 percent in mid-July 2018. Non-banking assets of finance
company has decreased by 6.21 percent to NPR 0.36 billion in mid-July 2019
from NPR 0.38 billion in mid-July 2018. Loan loss provision reached to NPR
1.9 billion in mid-July 2019 from NPR 1.8 billion in mid-July 2018. Finance
companies, as a whole, are in profit as reflected by their positive ROA (1.50
percent) and ROE (9.87 percent).
Net liquid assets to total deposit of finance companies stood at 31.46 percent in
mid-July 2019 which implies that finance companies are in comfortable position
in terms of liquidity. Out of total loan and advances, construction comprises the
highest share 14.50 percent, followed by wholesale and retail sectors (13.81
percent, and agriculture and forest related sector (6.90 percent) in mid-July 2019.
Share of fishery is minimal with 0.10 percent of the total, while 25.45 percent of
1
excluding five problematic finance companies which are under resolution process.

46
 Performance of Financial Institutions

the loan was provided to unclassified sectors. Likewise, the share of demand &
other working capital loan and term loan were 8.12 percent and 18.48 percent,
respectively. The share of deprived sector loan stood at 8.34 percent, higher than
the minimum requirement of 5 percent. In mid-July 2019 real estate loan had 7.53
percent share in total loan and advances.
Total number of finance companies which stood 25 in mid-July 2018 decreased
to 23 in mid-July 2019 as 2 finance companies got merged with other BFIs in the
review period. As of mid-July 2019, four finance companies are in problematic
status and under resolution process. In mid-July 2018, five finance companies were
in problematic status.

3.6 Stress Testing of Finance Companies

NRB has mandated all the national-level finance companies to conduct stress tests
and to report it to NRB on a quarterly basis. Stress testing result of 17 national-
level finance companies found that finance companies remained less vulnerable to
individual credit shocks and liquidity shocks in aggregate. However, for 1 finance
company, capital adequacy ratio decreased to less than 10 percent after combined
credit shocks. In the same way, for 10 finance companies, liquidity ratio decreased to
less than 20 percent after withdrawal of deposits by 20 percent. Position of finance
companies after stress testing scenarios is shown in the following table (Table 3.4).
Table 3.4: Summary Result of Stress Testing of Finance Companies
Criteria Number
No. of Finance Companies with CAR below 10 percent before shocks 0
A. Credit Shock
No. of FCs having CAR<10 percent
15 Percent of Performing loans deteriorated to substandard 1
15 Percent of Substandard loans deteriorated to doubtful loans 0
25 Percent of Doubtful loans deteriorated to loss loans 0
5 Percent of Performing loans deteriorated to loss loans 1
All NPLs under substandard category downgraded to doubtful. 0
All NPLs under doubtful category downgraded to loss. 0
25 Percent of performing loan of Real Estate & Housing
0
sector loan directly downgraded to Loss category of NPLs.
Top 5 Large exposures downgraded: Performing to
0
Substandard

47
Performance of Financial Institutions

B. Liquidity Shock
No. of Finance Companies having Liquidity Ratio<20 percent
Withdrawal of deposits by 5 percent 2
Withdrawal of deposits by 10 percent 5
Withdrawal of deposits by 15 percent 9
Withdrawal of deposits by 20 percent 10
Withdrawal of deposits by top 1 institutional depositors. 1
Withdrawal of deposits by top 2 institutional depositors. 1
Withdrawal of deposits by top 3 institutional depositors. 2
Withdrawal of deposits by top 4 institutional depositors. 2
Withdrawal of deposits by top 5 institutional depositors. 2
Withdrawal of deposits by top 1 individual depositors. 1
Withdrawal of deposits by top 2 individual depositors. 2
Withdrawal of deposits by top 3 individual depositors. 2
Withdrawal of deposits by top 4 individual depositors. 3
Withdrawal of deposits by top 5 individual depositors. 3

Note: Above mentioned data does not include data regarding 5 Problematic Finance
Companies which are under resolution process.

Table 3.5: Major Indicators of Finance Companies (as of mid-July 2019)

Particulars Ratios (in percent)

Core Capital to RWA (RWE in case of National Level) 18.54%
Capital Fund to RWA (RWE in case of National Level) 19.45%
Credit to Deposit (LCY) Ratio 86.27%
Credit to Deposit (LCY) & Core Capital 72.73%
Non-Performing Loan to Total Loan 2.41%
Liquid Assets to Total Deposits 36.16%
Weighted Average Interest on Credit 14.72%
Weighted Average Interest on Deposit 9.59%
Weighted Average Interest on Govt. Sec. 3.88%

48
 Performance of Financial Institutions

3.7 Performance of Microfinance Financial Institutions

As of mid-July 2019, there were altogether 90 microfinance financial institutions
(MFIs) operating as “D” class financial institutions. Among them, 4 are wholesale
lending MFIs, viz, RMDC, RSDC, Sana Kisan MFI and First Microfinance Financial
Institution.
Table 3.6: Key Performance Indicators of MFIs
Amount in NPR Thousand
Mid-July Mid-July Change
S.N. Particulars
2018 2019 %
1 No. of MFIs 65 90 38.46
1.1 No. of Retail MFIs 61 86 40.98
1.2 No. of Wholesale MFIs 4 4 0.00
2 No. of Branches of MFIs 2,450 3,547 44.78
2.1 No. of Branches of Retail MFIs 2,439 3,533 44.85
2.2 No. of Branches of Wholesale MFIs 11 14 27.27
3 Total Members of MFIs 2,856,859 4,330,586 51.59
3.1 No. of Members of Retail MFIs 2,856,179 4,329,836 51.60
3.2 No. of Members of Wholesale MFIs 680 750 10.29
4 Total Capital Fund of MFIs (NPR) 21,263,633 32,228,856 51.57
4.1 Capital Fund of Retail MFIs (NPR) 16,094,478 25,997,107 61.53
4.2 Capital Fund of Wholesale MFIs (NPR) 5,169,155 6,231,749.5 20.56
5 Total Paid-up Capital of MFIs (NPR) 11,182,470 17,077,797 52.72
5.1 Paid-up Capital of Retail MFIs (NPR) 8,782,573 14,174,458 61.39
5.2 Paid-up Capital of Wholesale MFIs (NPR) 2,399,897 2,903,339 20.98
6 Total Assets of MFIs (NPR) 175,610,062 273,062,387 55.49
6.1 Assets of Retail MFIs (NPR) 141,232,053 232,326,349 64.50
6.2 Assets of Wholesale MFIs (NPR) 34,378,009 40,736,038 18.49
7 Total Loan and Advances of MFIs (NPR) 145,951,477 235,153,361 61.12
7.1 Loans and Advances of Retail MFIs (NPR) 116,516,477 198,380,266 70.26
Loans and Advances of Wholesale MFIs
7.2 29,435,000 36,773,095 24.93
(NPR)

49
Performance of Financial Institutions

8 Total Savings in MFIs (NPR) 49,548,794 85,631,899 72.82

9 Total Borrowings of MFIs (NPR) 87,683,689 126,482,161 44.25
9.1 Borrowings of Retail MFIs (NPR) 61,259,102 95,247,701 55.48
9.2 Borrowings of Wholesale MFIs (NPR) 26424587 31234460 18.20
Total Overdue (Loan &Interest) of MFIs
10 2,371,253 4,204,690 77.32
(NPR)
Overdue (Loan & Interest) of Retail MFIs
10.1 2,358,540 4,188,854 77.60
(NPR)
Overdue (Loan & Interest) of Wholesale
10.2 12,713 15,836 24.57
MFIs (NPR)
11 Total Loan Loss Provision of MFIs (NPR) 2,391,710 4,011,640 67.73
11.1 Loan Loss Provisions of Retail MFIs (NPR) 2,008,068 3,540,415 76.31
Loan Loss Provisions of Wholesale MFIs
11.2 3,83,642 4,71,225 22.83
(NPR)
12 Public deposit 2,070,849 2,126,084 2.67
13 No. of Total Staff 11,557 17,362 50.23

Out of 86 Retail MFIs, 2 are public deposit takers, namely, Nirdhan Utthan
Microfinance Institution and Chhimek Microfinance Institution. As of mid_July
2019, the number of branches of all MFIs reached to 3,547; creating employment
for 17,362 employees. In comparison to previous year, the total members of MFIs
increased by 51.59 percent to 4,330,586 in mid-July 2019.
The total outstanding loan of MFIs as of mid-July 2019 increased by 61.12 percent
to NPR 235.15 billion as compared to NPR 145.95 billion in previous year. Out of
the total loans and advances; the wholesale loan shared only 15.64 percent, while
retail loans shared the rest 84.36 percent. The ratio of loan and advances to the total
assets stood at 86.12 percent. MFIs booked only 1.34 million as non-banking assets
during the review period.
Compared to mid-July 2018, as of mid-July 2019, total capital fund of MFIs
increased by 51.57 percent to NPR 32.23 billion. Out of total capital fund, capital
fund of wholesale and retail MFIs comprise NPR 6.23 billion and NPR 25.99
billion respectively. The total paid-up capital of MFIs increased by 52.72 percent to
reach NPR 17.08 billion. The ratio of paid-up capital to total capital stood at 52.99
percent. The paid-up capital of wholesale MFIs stood at NPR 2.90 billion. Based
on risk-weighted assets, MFIs are required to maintain at least 4.0 percent as core

50
 Performance of Financial Institutions

capital and 8.0 percent as the capital fund.

In the review period, total asset of MFIs increased by 55.49 percent and reached
NPR 273.06 billion. In this category, the share of wholesale MFIs’ assets stood at
14.92 percent only.
Total savings mobilized by the MFIs increased by 72.82 percent and reached NPR
85.63 billion in the review period. As compared to the total liabilities of these
institutions, the share of savings remained at 31.36 percent. Out of total savings, the
share of public deposits is only 2.48 percent which was collected by two microfinance
institutions, viz. Chhimek Laghubitta Bittiya Sanstha Limited and Nirdhan Utthan
Laghubitta Sanstha Limited., and the rest being collected from the members of 84
retail microfinance institutions. Total borrowings of these MFIs during the review
period increased by 44.25 percent and reached NPR 126.48 billion. Out of the total
borrowings, wholesale MFIs borrowed 31.23 billion, which comprises only 24.69
percent of total borrowing. As compared to total liabilities of MFIs, the share of
borrowed amount remained at 46.32 percent.
The total amount of overdue loan, including interest, of these institutions increased
by 77.32 percent to NPR 4.21 billion as compared to the same period of the last
year. The overdue of wholesale MFIs stood at NPR 15.84 million. Likewise, the
amount of loan loss provision of these MFIs increased by 67.73 percent to 4.01
billion during the review period.
At last, most of the key performance indicators of MFIs improved encouragingly
due largely to the increase in the number of MFIs by 38.46 percent in review
period. Due to, regulatory requirement, 24 financial intermediary non-governmental
organizations (FINGO) were upgraded to MFIs during the review year. This is the
primary cause of a sharp increase in the number of MFIs in the review period.

3.8 Financial Literacy

Realizing the importance of financial literacy to improve the demand side of financial
access, NRB is being involved in various activities to promote financial literacy
in the country. FY 2018/19 was a step forward in the continuous effort of NRB.
As NRB is affiliated with different international organizations like Alliance for
Financial Inclusion (AFI), and Child and Youth Finance International (CYFI) which
are dedicated to promote financial inclusion and financial literacy in the country;
various financial literacy- programs were conducted in FY 2018/19 as well. As a
member of AFI, NRB has made some commitments towards financial inclusion
under the ‘Maya Declaration 2013’ and most of the commitments in this regard
51
Performance of Financial Institutions

have been fulfilled. The monetary policy of FY 2018/19 envisioned bank account
for every citizen and a campaign was announced (NRB, 2018). Similarly, banks
were allocated and mandated to open bank branches in local bodies to improve the
access. As a result, the accessibility of banking increased to 735 of the 753 local
bodies in the review period.
A special school-visit program, entitled ‘NRB with Students’ has been initiated by
the NRB on financial literacy since FY 2013/14. During this on-going program, a
team of NRB visits different schools to organize a brief presentation on financial
literacy and distributes the financial literacy materials to the students. NRB has
already organized several of such programs in different schools throughout the
country. Most of these programs were chaired by the high-level authorities of NRB,
including Governor himself in many occasions. NRB has also been working closely
with the Ministry of Education to incorporate the issues of financial literacy in
formal educational curriculum. To promote financial literacy, a separate window
has been dedicated within the NRB web-site. SEBON as well as the FNCCI also
help educate people including investors, entrepreneurs and businesspersons,
students and academicians through various programs.
Similarly, SEBON has been conducting investors awareness programs continuously
and it has so far conducted such programs in more than 50 districts. SEBON has
published different educational materials for investors of securities market such
as “Capital Market Literacy”, FAQ on securities market, and Investment tips for
investors.

52
 Non Banking Financial Institutions

Chapter - IV
Non Banking Financial Institutions

4.1 Performance of Cooperatives

All NRB licensed cooperatives for undertaking limited banking activities have been
removed from regulatory and supervisory ambit of NRB from FY2018/19 onwards.
These cooperatives are now within the regulatory jurisdiction of Department of
Cooperatives. Thus, there is no NRB licensed cooperatives from 17 July 2018.

4.1.1 Government Registered Cooperatives

According to statistics from Department of Cooperatives, 34,763 cooperatives
comprising 6.51 million membership Figure 4.1
are operating throughout the country Capital, Deposit and Credit Growth of Cooperatives
60
as of mid-July 2019. Capital
Credit
50
Saving

4.1.2 Financial Highlights of 40

Cooperatives 30
Percent

20
As of mid-July 2019, deposits of
10
cooperatives totaled NPR 345.58 billion
while their total credit stood at NPR
0

332.71 billion. Cooperatives have total

-10
2015 2016 2017 2018 2019

capital of NPR 76.342 billion. Fiscal year ending mid-July

Table 4.1: Key Figures of Cooperatives (As of Mid-July 2019)

Indicators Figures
No. of Cooperatives 34,737
Members (Nos.) 6.51 Million
Total Staff (Nos.) 63,500
Total Capital (in NPR) 76.34 Billion
Deposit (in NPR) 345.58 Billion
Credit (in NPR) 332.71 Billion
Credit to Deposit Ratio 96.27%
Credit to Capital and Deposit Ratio 78.85%
Source: Department of Cooperatives

53
Non Banking Financial Institutions

The number of cooperatives Table 4.2: Growth of Cooperatives over the Years
has increased in FY2018/19.
The Department of Growth Growth
Fiscal Year Number
(Number) Rate
Cooperatives has been
adopting stringent policies 1997-98 4349 - -
for registration of new 1998-99 4860 511 10.51%
cooperatives, particularly
1999-00 5671 811 14.30%
for savings and credit
cooperatives, as most of the 2000-01 6484 813 12.54%
cooperatives involved in 2001-02 7074 590 8.34%
saving and credit operation
were found to be operating 2002-03 7445 371 4.98%
without following the 2003-04 7598 153 2.01%
Cooperative Standard 2004-05 8045 447 5.56%
issued by the Department.
Similarly, the Department 2005-06 8530 485 5.69%
has been cautious over 2006-07 9720 1190 12.24%
registration of new
2007-08 11302 1582 14.00%
multipurpose cooperatives.
2008-09 15813 4511 28.53%
4.2 Other Financial 2009-10 20102 4289 21.34%
Institutions
2010-11 23301 3199 13.73%
4.2.1 Insurance 2011-12 26500 3199 12.07%
Companies
2012-13 29526 3026 10.25%
There are altogether 40 (20 2013-14 31177 1651 5.30%
non-life and 19 life and
1 Reinsurance) insurance 2014-15 32663 1486 4.77%
companies as of mid-July 2015-16 33599 936 2.87%
2019. Total assets/liabilities
2016-17 34646 1047 3.12%
of insurance companies
rose by 33.36 percent to 2017-18 34512 -134 -0.39%
NPR 347.15 billion in 2018-19 34763 251 0.72%
FY2018/19. Total assets of
life insurance companies’ Source: Department of Cooperatives
and non-life companies expanded by 34.91 percent and 25.69 percent respectively.

54
 Non Banking Financial Institutions

Table 4.3: Sources and Uses of Funds of Insurance Companies

In Billion NPR
Life Non-Life
Sources
2015/16 2016/17 2017/18 2018/19 2015/16 2016/17 2017/18 2018/19
Paid-up Capital 6.24 8.30 25.56 30.84 4.75 6.22 10.41 13.91
Reserve Funds 115.69 138.41 180.12 248.75 21.07 24.41 23.62 35.15
Other Liabilities 7.95 4.35 10.92 12.63 4.23 4.2 9.67 5.86
Total 129.88 151.06 216.60 292.22 30.05 34.83 43.70 54.93
Uses Life Non-Life
Cash and Bank 2.36 2.25 3.75 6.69 3.18 2.37 3.15 2.63
Investment 117.98 138.83 196.23 263.88 16.82 22.42 31.54 38.05
Fixed Assets 1.66 1.64 2.20 2.47 1.1 1.36 1.42 1.79
Other Assets 7.89 8.34 14.42 19.19 8.96 8.67 7.59 12.46
Total 129.88 151.06 216.60 292.22 30.05 34.83 43.70 54.93
Source: Beema Samiti (Insurance Regulatory Authority of Nepal)

While the coverage of insurance Figure 4.2

Number of Policies Issued by Insurance Companies

penetration is very low in comparison to

2,000,000
Life Insurance
Non-Life Insuranc e

other financial services in Nepal, there 1,800,000

have been some sign of significant growth 1,600,000

in recent years. Number of policies issued 1,400,000

have risen steadily over the years and 1,200,000

reached 3.9 million (1.94 million non-life

and 1.96 million life) in the review period.
1,000,000
2015 2016 2017 2018 2019
Fiscal Year Ending mid-July

Source: Beema Samiti (Insurance Regulatory Authority of Nepal)

4.2.2 Reinsurance Companies

There is only one reinsurance company in Nepal which was formally established
in November 7, 2014. Before its establishment, there was an institution called
Insurance Pool Nepal to make arrangement of reinsurance for bearing the claims
of risk emanating from riot, strike, malicious damage & terrorism (RMSDT).The
reinsurance company, presently, has been carrying out various reinsurance portfolios
mostly in non-life part. The total assets/liabilities of reinsurance company rose by
20.91 percent to NPR 12.14 billion during FY2018/19.

55
Non Banking Financial Institutions

4.2.3 Employees Provident Fund (EPF)

The total assets of EPF increased by 18.64 percent to NPR 346.64 billion in
FY2018/19. Likewise, the funds collected by the EPF grew by 11.15 percent to
NPR 309.85 billion in the review period. Similarly, it has reserve created from the
profit worth of NPR 33.42 billion.
On utilization side, 52.15 percent of the fund is used in lending to contributors,
whereas, 22.59 percent is used in investment in fixed deposits. EPF has been utilizing
almost all of its total resources. The loan and investment to total fund ratio stands
at 97.60 percent. Its cash and bank balance stood at NPR 4.15 billion. Though cash
and bank balance seem to be on lower side, EPF has investment in equity shares,
which are highly liquid and can be used to support its liquidity requirements.
Table 4.4: Key Indicators of EPF mid- July, 2019 (unaudited)
Amount (Billion
Indicators
NPR)
Sources of Fund
Provident Fund 309.85
General Reserve and Funds 33.42
Liabilities 1.32
Provisions 2.05
Uses of Fund
Cash and bank 4.15
Investment in Government Saving Bonds 0.53
Investment in Fixed Deposits 78.32
Investment in Equity Shares 25.43
Project Loan 52.28
Lending to Contributors 180.79
Investment Properties (Investment in Fixed Assets) 0.97
Property, Plant and Equipment (Fixed Assets) 0.26
Assets under construction 0.02
Miscellaneous Assets 3.89
Loan and Investment to Total Fund Ratio 97.60
Loan and Investment to Provident Fund Ratio 109.19
Source: Employee Provident Fund

56
 Non Banking Financial Institutions

4.2.4 Citizen Investment Trust (CIT)

CIT is another institutional fund mobilizer with a significant market share. As of
mid-July 2019, net fund collections of CIT stood at NPR 148.90 billion, recording
a growth of 30.54 percent from NPR 114.06 billion in mid-July 2018. Apart from
its capital, reserve and other liabilities of NPR 22.90 billion, regular contributions
from members are the only and major source of fund for CIT. Uses of fund of the
Trust, which are diversified in three broad categories, stood at NPR 84.22 billion.
CIT has been heavily dependent on BFIs for its fund mobilization. Out of total
funds, 51.50 percent has been placed on fixed deposits at BFIs. While fixed deposit
accounts 91.05 percent of total investment of CIT, loan and advances to participants
accounts 27.29 percent. Considering the nature of the funds, which have longer
term prospect, it can be utilized for long term projects with high return.
Table 4.5: Key Figures of CIT mid- July, 2019
Indicators Figures (Billion NPR)*
Sources of Funds
Paid up Capital 1.10
Reserve Fund 4.22
Fund Collection 126.00
Other Liabilities 17.57
Total 148.90
Uses of Fund
Cash and Bank Balances 6.03
Investments 84.22
a) Fixed Deposits 76.70
b) Governments Bonds 0.60
c) Shares 6.93
d) Debentures 0.97
Loan and Advances 40.65
Fixed Assets& Assets in WIP 0.97
Other Assets 17.02
Total 148.90
*Provisional
Source: Citizen Investment Trust

57
Non Banking Financial Institutions

4.2.5 Social Security Fund (SSF)

The Social Security Fund (SSF) is a type of pension fund scheme which is based
on individual workers’ contribution. This fund provides various benefits such as
assistance for medical treatment, health and maternity protection, accident and
disability protection, dependent family protection, and elderly protection of
employee from the day of joining to the retirement. Organizations registered under
the scheme will only be eligible to enjoy the benefits offered by the fund.

58
 Financial Markets

Chapter - V
FINANCIAL MARKETS

5.1 Global Financial Market Perspectives

5.1.1 US Government Treasuries
Yields on US government treasuries Figure 5.1
Daily Yield Curve Rates for 3 Months T-Bills

continued its gradual increasing trend in

2.5

FY 2018/19. This is mostly attributable

2.4

to the continuation of hike in US Federal

2.3

Percent
Funds Rate by Federal Reserve. There
2.2

were two rate hikes of 25 basis points each

2.1

in the review year (September 2018 and

2.0

December 2018), which raised the rate to

1.9

10/10/2018
10/24/2018
11/07/2018
11/23/2018
12/10/2018
12/24/2018
7/16/2018
7/30/2018
8/13/2018
8/27/2018
9/11/2018
9/25/2018

1/09/2019
1/24/2019
2/07/2019
2/22/2019
3/08/2019
3/22/2019
4/05/2019
4/22/2019
5/06/2019
5/20/2019
6/04/2019
6/18/2019
7/02/2019
7/17/2019
2.50 percent. The yield on three months
T-bills that averaged 1.46 in the last
review period spiked to and sustained at Figure 5.2: 10YR U.S. Government Bond Rate
3.4

2.25 percent throughout the FY 2018/19. 3.2

The three months T-bill yield curve 3.0

showed the lowest yield of 1.95 percent 2.8

Percent

on 20 July 2018 and the highest return of

2.6

2.4
2.43 percent on 21 March 2019. 2.2

Contrary to the yield on short term 2.0

security, the yields on long term securities 1.8

7/16/2018
7/30/2018
8/13/2018
8/27/2018
9/11/2018
9/25/2018
10/10/2018
10/24/2018
11/07/2018
11/23/2018
12/10/2018
12/24/2018
1/09/2019
1/24/2019
2/07/2019
2/22/2019
3/08/2019
3/22/2019
4/05/2019
4/22/2019
5/06/2019
5/20/2019
6/04/2019
6/18/2019
7/02/2019
exhibited a slightly declining trend in the
review year. The yield remained broadly
stable at around 2.70 percent throughout the review period. The yield reached a
peak of 3.24 percent on 8 November 2018 but continuously declined to reach to
the lowest of 1.96 percent on 3 July, 2019.
5.1.2 Crude Oil
Brent crude oil, the international benchmark, was trading between US dollars 48
to 79 per barrel during the review period. The crude oil prices reached the highest
level of US dollar 79.8 per barrel on 23 May 2018 with the lowest point being
US dollar 48.06 on 21 July 2017. The crude oil price, though fluctuating in the
short term, was broadly on a rising trend in the review year. Generally, oil prices
fluctuate because of changes in supply and demand, but there are multiple factors
at play like weather events, supply interruptions, broader demand trends such as

59
Financial Markets

the emergence of renewable energy, Figure 5.3

OPEC decisions, or other events that can

Europe Brent Crude Oil Price (USD per barrel)
90

have an immediate effect on supplies 85

that can affect those fundamentals. The 80

disruption in oil supply across the world 75

as a result of terrorism, strikes, sabotage 70

or lack of maintenance were the reasons 65

for price fluctuations in the review year.

60

55

5.1.3 Dollar Index 50

The U.S. Dollar Index is an index

7/16/2018
7/30/2018
8/13/2018
8/27/2018
9/10/2018
9/24/2018
10/08/2018
10/22/2018
11/05/2018
11/19/2018
12/03/2018
12/17/2018
1/02/2019
1/16/2019
1/30/2019
2/13/2019
2/27/2019
3/13/2019
3/27/2019
4/10/2019
4/25/2019
5/09/2019
5/23/2019
6/06/2019
6/20/2019
7/04/2019
measure of the value of the United States
dollar relative to a basket of foreign
Figure 5.4
currencies including Euro, Japanese Movement of U.S. Dollar Index
Yen, Pound Sterling, Canadian Dollar,
99

Swedish Krona and Swiss Franc. The 98

US dollar index swung between gains 97

and losses in the review year due to lack 96

of clear clue. The index went as low as 95

88.59 on 15 February 2018 to the highest
of 95.312 on 28 June 2018. The dollar 94

saw a high level of volatility with the 93

7/16/2018
7/30/2018
8/13/2018
8/27/2018
9/10/2018
9/24/2018
10/08/2018
10/22/2018
11/05/2018
11/19/2018
12/03/2018
12/17/2018
12/31/2018
1/14/2019
1/28/2019
2/11/2019
2/25/2019
3/11/2019
3/25/2019
4/08/2019
4/22/2019
5/06/2019
5/20/2019
6/03/2019
6/17/2019
7/01/2019
7/15/2019
Fed’s rate hikes as well, Besides geo-
political tensions in Middle-East, Russia
and North Korea and trade war with Figure 5.5

China also played role. 120

Movement of Nominal Exchange Rate (NRs per USD)

5.1.4 Dollar-Rupee Exchange Rate

116

Nepalese currency depreciated by 0.76

112

108

percent against US dollar during the 104

end of FY 2018/19 compared to a sharp 100

depreciation by 6.30 percent in the 96

same period of the previous year. The 92

exchange rate of one US dollar stood at

7/1/2013
9/1/2013
11/1/2013
1/1/2014
3/1/2014
5/1/2014
7/1/2014
9/1/14
11/1/14
1/1/2015
3/1/15
5/1/15
7/1/2015
9/1/15
11/1/15
1/1/2016
3/1/16
5/1/16
7/1/2016
9/1/16
11/1/16
1/1/2017
3/1/17
5/1/17
7/1/2017
9/1/17
11/1/17
1/1/2018
3/1/18
5/1/18
7/1/2018
9/1/18
11/1/18
1/1/2019
3/1/19
5/1/19
7/1/2019

NPR 113.48 in mid-July 2019 compared

to NPR 109.34 in mid-July 2018.

60
 Financial Markets

5.2 Domestic Financial Market

5.2.1 Securities Market
In recent years, SEBON has been implementing various structural reform
programmes and policies to develop and modernize the securities markets. Primary
market services have been expanded to all districts through the channels of more
than 3,500 BFI branches. SEBON has also expanded services of merchant banking
and securities broking business outside the Kathmandu valley as well. SEBON
has introduced alternative investment vehicle regulations to promote the use of
alternative investment instruments such as private equity, venture capital, hedge
funds. During the period, one open ended mutual fund also entered into the market.
SEBON also provisioned the margin trading facility to increase the liquidity of
securities. Similarly, NEPSE has begun to calculate mutual fund sub-index to trace
the price of mutual fund industry.
IN FY 2018/19 Securities market scenario remained mixed. Most of the secondary
market indicators such as NEPSE index, market capitalization, number of listed
companies and turnover increased compared to the last year. During the period,
total fund mobilised through primary market decreased slightly. In the review year,
debentures were issued significantly. Likewise, the number of securities market
participants also increased in FY 2018/19. The list of securities market participants
is presented in Table 5.1.
Table 5.1: Securities Market Participants
Mid- Mid- Mid- Mid Mid
SN Participants July July July July July
2015 2016 2017 2018 2019
1 Stock Exchange 1 1 1 1 1
2 Central Depository Company 1 1 1 1 1
3 Stockbroker 50 50 50 50 50
4 Merchant Banker 16 17 24 25 30
5 Fund Manager and Depository 5 6 9 9 9
6 Credit Rating Agency 1 1 1 2 2
7 Listed Companies 232 229 208 196 215
8 Depository Participant 53 66 65 70 72
9 ASBA BFIs - - 65 52
Total 357 371 426 419 432

61
Financial Markets

5.2.2 Primary Market

During last three fiscal years, corporate sectors have mobilized fund through IPOs,
FPOs, right offerings, stock dividends, debentures and mutual fund schemes. In
FY 2018/19, funds amounting to NPR 7.35 billion were mobilized through IPOs,
Rs 5.88 billion through right shares, NPR 29.98 billion through debentures and
NPR 6.55 billion through mutual fund schemes. Thus, a total of NPR 49.76 billion
funds were mobilized in the FY2018/19 which is less by 6.6 as compared to the
total fund mobilization of NPR 53.3 billion in the last fiscal year. Decrease in right
offerings and absence of FPOs attributed to the decline of fund mobilization in
primary market. During this period, one open ended mutual fund entered in the
market. Primary market data of three fiscal years is presented in Table 5.2.
Table 5.2: Primary Market(Amount in Rs billion)
  Percentage Change
S
Particulars 2016/17 2017/18 2018/19 In Number In Amount
N
Number Amount Number Amount Number Amount 2017/18 2018/19 2017/18 2018/19
1 IPOs 17 1.51 21 8.3 28 7.35 23.5 33.3 449.7 -11.4
Right
2 76 45.64 55 25.7 19 5.88 -27.6 -65.5 -43.7 -77.1
Offerings
3 FPOs 4 7.99 6 11.5 - - 50.0 - 43.9 -
4 Debenture - - 1 3 12 29.98 - 1100.0 - 899.3
Mutual
5 4 4.25 4 4.8 6 6.55 0.0 50.0 12.9 36.5
Fund
Total 101 59.39 87 53.3 65 49.76 -13.9 -25.3 -10.3 -6.6

The primary market has been expanded to 2500 places (77 districts) of the country
through Applications Supported by Blocked Amount (ASBA) System. After the
introduction of CASBA System, people can participate in IPO through online
system throughout the country. SEBON introduced inclusive securities allotment
system which helped to increase the number of securities investors.
5.2.3 Secondary Market
In FY 2018/19, major indicator of the secondary market remained positive. The
number of listed companies increased to 215 from 196 in the last fiscal year. In FY
2018/19, total traded value of the listed securities remained NPR 110.07 billion, a
decrease of 9.3 percent as compared to NPR 121.4 billion of FY 2017/18. Average
daily turnover was NPR 0.52 billion, a decrease of 41.6 percent as compared to
NPR 0.89 billion of FY 2017/18.

62
 Financial Markets

The market capitalization reached Rs 1,567.5 billion, an increase of 9.2 percent as

compared to last fiscal year. Similarly, float market capitalization also increased by 15.4
percent over last year to NPR 558.25 billion. The 2018/19 NEPSE Index also plunged
by 3.8 percent over last year to 1,259.02 points. Float Index which was at 87.15 points
in the FY 2017/18, increased by 6.1 percent to 92.43 points in FY 2018/19. The trends
in secondary market during last three fiscal years is presented in Table 5.3.
Table 5.3: Secondary Market
Percentage
Fiscal Year
SN Indicators Unit Change
2016/17 2017/18 2018/19 2017/18 2018/19
Listed
1 Number 208 196 215 -5.8 9.7
Companies
Rs in
2 Annual turnover 205.02 121.4 110.07 -40.8 -9.3
billion
Average daily Rs in 10
3 89.14 52.1 44.75 -41.6 -14.1
turnover million
No. in 10
4 Traded Securities 39.29 29.4 38.75 -25.2 31.8
million
No of No in 10
5 1.36 1.31 1.42 -3.7 8.4
Transaction million
Number of Listed No in 10
6 296.59 359.87 420.66 21.3 16.9
Securities million
Market
7 Rs billion 1856.82 1435.14 1567.5 -22.7 9.2
Capitalization
Float Market
8 Rs billion 641.69 483.9 558.25 -24.6 15.4
Capitalization
Turnover/Market
9 Percentage 11.04 8.5 7 -23.0 -17.6
Capitalization
Market
10 Capitalization/ Percentage 71.44 47.7 45.25 -33.2 -5.1
GDP
Float Market
11 Capitulation/ Percentage 24.69 16.1 16.11 -34.8 0.1
GDP
12 NEPSE Index Unit 1582.67 1212.36 1259.02 -23.4 3.8
NEPSE Float
13 Unit 116.14 87.15 92.43 -25.0 6.1
Index
Source: Nepal Stock Exchange Ltd .

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Financial Markets

Secondary market services have been expanded to 95 Places. There are around 1.5
million investors participating through their own DEMAT accounts. Online trading
system has been introduced and more than 24000 investors are using the system.
On a regulatory perspective, SEBON introduced the Corporate Governance codes
for listed companies while legal framework and regulatory mechanism for venture
capital and private equity fund were also implemented. Similarly, Anti-money
Laundering Guidelines and KYC requirements for securities businesspersons have
been implemented subject to legal actions in case of noncompliance.

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 Payment System

Chapter - VI
Payment System

6.1 Evolution of Payment System

Secure, affordable and accessible payment systems and services help expand
financial inclusion, foster development and support financial stability. NRB has
been entrusted with the responsibility of establishing and promoting the system of
payment, clearing and settlement and to regulate these activities in order to develop
secure, healthy and efficient system of payment in the country. Payment systems
have been considered to be an important element of the financial stability and is
evolving as a core central banking function around the world. It is believed that a
well-developed payment system ultimately contributes to strengthen the domestic
financial system.
Payment System modernization effort in Nepal was started with the formulation
of Nepal Payment System Development Strategy, 2014. Since then, NRB has
initiated number of reforms in the payment systems. Currently, Payment Systems
Department (PSD) of NRB has been performing regulatory, catalytic, operator, and
overseer role in the payment systems. Payment and Settlement Act, 2019, Payment
and Settlement Bylaw, 2015 and Licensing Policy for Payment Related Institutions
2016 provide a strong legal basis for the development of national payment system.
Increasing number of card users, IPS users, digital banking users and e-Commerce
users show that Nepalese payment system has been developing rapidly. As an
overseer of the National Payment System, NRB is committed to ensure safety
and efficiency of the payment system. Payment Systems Department of NRB
oversees all licensed Payment Service Providers and Payment System Operators
as per the approved annual work plan based on the Principles of Financial Market
Infrastructures (PFMIs).

6.2 Legal Framework

6.2.1 Payment and Settlement Act, 2019 is one of the most important legal
frameworks that came into existence during the review period. The Act has
the following salient features:
o Licensing responsibility: NRB has been tasked with the responsibility
65
Payment System

of issuance, withdrawal or refusal of license to an entity to work as a

payment service provider or provide any service under the Act.
o Oversight: NRB is empowered to monitor and conduct inspection of the
licensed institutions and the services they provide on a regular basis.
o Dispute Settlement Committee: In the event of any dispute arising
between the institutions regarding any work to be performed under this
Act, the same will be handled by the Dispute Resolution Committee.
o Powers to give direction: NRB has the powers to give directions to its
licensed entities.
o Powers to frame regulations: Under the Act, NRB has powers to frame
by-laws for administration of the Act.
o National Payment Board: The Act has made the provision of National
Payment Board to make payment system safe, sound and efficient for
financial stability, to minimize the risk inherent in payment systems
and to regulate, monitor and oversee the activities regarding payment
system.
o Secretariat to the Board: A department of NRB as prescribed provides
secretariat support to the Board.
o Institution responsibility: The Act has clearly defined the responsibilities
of PSPs and PSOs.
o RTGS: NRB has launched the RTGS system for large value and critical
payment.
o Punishment, fine and penalties: Provisions for punishment, fine, and
penalties has been mentioned in the act for the licensed entity in case of
breach of act, bylaws or directions made under this act .

6.2.2 Payment and Settlement Bylaw, 2015 has been formulated for the
development of the secure, healthy and competent payment system. It is
further required for the fulfillment of the objective of NRB Act that specify
the functions related to regulation, supervision and oversight over the
services and instruments issued by the institutions which operate payment
and settlement services.

6.2.3 Directives are issued to regulate the institutions.

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 Payment System

o Directive No. 1: It regulates the Electronic Payment Cards in terms

of the issue and operation and regulatory compliance of electronic
cards as well as the settlement of transactions. It also sets timelines
for all electronic payment instruments like electronic payment cards,
POS/POT Terminals, and ATMs to be chip-based that ensures these
instruments are safe and secure enough.
o Directive No. 2: It is about Conducting Financial Service Operation in
domestic currency through Telecommunication Networks.
o Directive No. 3: It specifies on Adoption of Security Measures while
providing electronic payment services. It seeks needful arrangements
from the service provider to make the transactions secure.
o Directive No. 4: It mandates the provision of Settlement Bank. The
directive regulates all non-bank PSPs must have a settlement account
in class A Bank.
o Directive No. 5: It defines transaction limit for different electronic
payment instruments like credit card, debit card, prepaid card, mobile
banking, internet banking, e-wallets, etc.
o Directive No. 6: It defines the timeline for submitting the Annual
Financial Report.
o Directive No. 7: It defines the prerequisites, procedures, infrastructures
required to obtain license for payment system function by Micro-
Finance Institutions.

6.3 Licensing
NRB is issuing license to operate as a PSOs and PSPs. With the objective of
promoting innovation in digital financial services, PSD is also giving permission to
add additional services to licensed PSOs and PSPs.
During the review period, NRB has issued license to eleven development banks,
one finance company and five non-BFIs to work as PSO/PSP. Among five non-
BFIs, two are licensed as PSOs and three as PSPs. Similarly, LOI for seventeen
institutions have been issued during the review period to operate as PSOs and
PSPs.
With this, all the commercial banks, fifteen development banks, and five finance
companies are operating as PSO/PSP. Apart from this, there are a total of sixteen

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Payment System

institutions licensed by NRB that are operating as payment institutions. Among

them six are PSOs and ten are PSPs.

Table 6.1: Licensed Institution to Perform Electronic Payment

S.N. Category Number
1 Commercial Bank (“A” Class) 28
2 Development Bank (“B” Class) 15
3 Finance Company (“C” Class) 5
4 Payment System Operator (PSO) 6
5 Payment System Provider (PSP) 10

6.4 Large Value Payment Systems

As an operator of the payment system and based on the mandate given by
Payment and Settlement Act and Bylaw, NRB has installed and implemented
Real-Time Gross Settlement (RTGS) System for large value and critical
payment. RTGS System is an electronic fund transfer system in which the
transfer of funds between one bank to another takes place in “real-time” and
on a “gross” - transaction by transaction basis, without bundling or netting with
any other transaction.
RTGS System formally started from 12th September 2019. PSD has issued
RTGS System Rule, 2019 which regulates the membership criteria, members’
responsibilities, settlement rules, operating procedures in the RTGS system.
Similarly, NRB has issued a separate directive for the operation of RTGS.
Transactions can be settled in five different currencies i.e. Nepalese Rupees
(NPR), US Dollar (USD), Euro (EUR), Pound Sterling (GBP), and Japanese Yen
(JPY). Minimum limit for value of credit transfers in RTGS is NPR 200,000 and
threshold for mandatory transaction has been set at NPR 2 Million or above.
Currently, all Commercial Banks are operating as direct participants of the
RTGS System.
RTGS implementation has eased the large value payment process which was earlier
based on manual clearing in NRB’s general ledger (Olympic) system. Further, it is
expected that the RTGS System will enhance the trust and confidence towards the
payment system as it significantly reduces liquidity risk and eliminates credit risk
in payment mechanism. NRB’s liquidity management is also expected to be more
efficient with this system.

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 Payment System

6.5 Retail Payment System (RPS)

The retail payment systems in Nepal have been experiencing significant
developments. Banks continue to be the major providers of retail payment
services to consumers, businesses and Government. NRB has licensed 51 banks
and financial institutions as PSPs to operate retail payment activities. Seven
non-bank institutions have been licensed as PSOs while another ten have been
licensed as PSPs.
Banks provide their customers with account-based services, cheque facility, debit
and credit cards, e-money, remittance services, and online banking facilities
(internet/mobile). Non-bank PSPs provide e-money services to their customers.
NRB has initiated the process to give permission to domestic payment institutions
to acquire international wallets through settlement arrangement in Nepal. NRB has
also taken initiation to establish national payment switch to allow interoperability
in the retail payment systems.
As an effort for payment system modernization, NRB formulated and published
a Retail Payment Strategy (RPS), 2019. RPS, amongst others, focuses on key
pillars of (i) strengthening the legal and regulatory framework, (ii) deepening
digital retail payment systems, (iii) government and remittances payment
to transaction account, (iv) settlement in central bank money, (v) financial
awareness, (vi) oversight-covering endpoint security, and (vii) coordination
with authorities.

6.6 Payment System Development and Financial Stability

Payment systems and financial market infrastructures (FMIs) are the mechanisms
established to facilitate the clearing and settlement of monetary and other financial
transactions. Safe, reliable and efficient payment systems and FMIs perform the
following:
• Support financial stability by mitigating risks related to financial transactions
and facilitating the smooth flow of payments and efficient functioning of
financial markets.
• Promote efficiency in the economy by facilitating the smooth flow of payments
that magnifies economic activity and promote financial sector development
through fostering consumers’ confidence in the use of money and payment
services.

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Payment System

• Enable access to transaction accounts as a means to safely store value, and make
and receive payments, and foster financial inclusion.
• Foster transparency and efficiency in the national and international remittances
markets.  
• Support the digitization of government payments as part of cross-cutting work in
areas like consumer protection, e-Governance and public financial management
reforms. The work spans across the revenue collection and expenditure side,
including large scale programs like tax collection, public sector salary payments,
public procurement and other government to person (G2P) payments.

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 Financial Sector Policies and Infrastructures

Chapter - VII
FINANCIAL SECTOR POLICIES AND
INFRASTRUCTURES

7.1 Domestic Policy Developments

To ensure stability and foster development, NRB has taken and maintained an
accommodative stance to facilitate the growth rate set by GON. In these regards,
status of the policies and updates in regulatory measures that were made in the FY
2018/19 are outlined below.

7.1.1 Implementation of Basel III

Realizing the importance of stringent measures for banking sectors, the Basel
Committee on Banking Supervision (BCBS) issued “Basel III: A global regulatory
framework for more resilient banks and banking systems” in December 2010.
In order to enhance the financial stability, NRB has implemented regulatory
provisions of Basel III. Commercial banks were required to meet minimum capital
adequacy based on Basel III with effect from mid-August 2016. As a result,
banks have started to calculate their capital funds according to Capital Adequacy
framework, 2015 published by NRB which is based on Basel-III. Basel III will
be implemented at national level development banks and national level finance
companies gradually.
Basel II has been fully implemented in national level development banks. National
level development banks are required to calculate their capital fund according to
Capital Adequacy framework, 2007 (updated 2008), whereas, other development
banks and finance companies are required to report under Basel I. Meanwhile, NRB
has directed national level finance companies to report their capital fund in parallel
way under the provisions of Basel I & Basel II.
In order to enhance the risk absorption capacity of banks by strengthening the capital
base, a provision is made for commercial banks to maintain capital conservation
buffer (CCB) equal to 2.5 percent of total risk weighted assets. Instruments under
common equity tier 1 capital will be used for such calculation. The framework of
capital conservation buffer is expected to strengthen the ability of banks to withstand

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Financial Sector Policies and Infrastructures

adverse economic environment conditions, will help increase banking sector

resilience both going into downturn, and provide the mechanism for rebuilding
capital during the early stages of economic recovery. The CCB, introduced in 2016,
has been in implementation from mid-July 2019.
NRB has introduced counter cyclical buffer in “Capital Adequacy Framework,
2015” to ensure that banking sector capital requirements take account of the macro-
financial environment in which banks operate. Its aim is to protect the banking sector
from periods of excess aggregate credit growth that have often been associated with
the buildup of system wide risk. Therefore, to minimize the adverse impact of pro-
cyclicality and fluctuations in macroeconomic variables on financial sector, this
provision has been made for banks to maintain an additional counter cyclical buffer
up to a maximum of 2.5 percentage point of total risk weighted assets by mid-July
2020.
Commercial banks are required to maintain minimum Tier 1 leverage ratio of 4
percent. The banks are required to maintain the leverage ratio on a quarterly basis.
Non-risk-based leverage ratio that includes off-balance sheet exposures will serve
as a backstop to the risk-based capital requirement. It also helps contain system
wide buildup of leverage.

7.1.2 Basel III Liquidity Framework

During the time of Global financial crisis, many banks with adequate capital
levels also experienced difficulties because of their weak liquidity management.
In response to this, BCBS issued guidelines, “Basel III: International framework
for liquidity risk measurement, standards and monitoring (December 2010)”.
BCBS has established some principles for Sound Liquidity Risk Management
and Supervision. In addition to the principles, Basel III introduced two ratios for
liquidity monitoring and management in banks; (i) liquidity coverage ratio (LCR)
&, (ii) net stable funding ratio (NFSR).
LCR is introduced to promote short-term resilience by requiring sufficient high-
quality liquid assets to survive acute stress lasting for 30 calendar days. NRB has
developed its own liquidity monitoring framework for the short-term liquidity
monitoring of the banks.
Similarly, NSFR is aimed at promoting resilience over longer term through
incentives for banks to fund activities with more stable sources of funding. The
ratio is developed to address the maturity mismatch between liabilities and assets
in the financial sector and to make sure that banks have sufficient stable funding to
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 Financial Sector Policies and Infrastructures

withstand a yearlong liquidity crisis. NRB is currently in line to implement LCR

and NSFR related guidelines by end of FY 2019/20.

7.1.3 Nepal Infrastructure Development Bank

Infrastructure has always been a backbone for economic growth. With the aim of
addressing the infrastructure funding gap, Nepal Infrastructure Development Bank
(NIFRA) was given operating license in FY 2018/19. NIFRA was conceptualized
as a vehicle for investment and improvements in infrastructures of energy,
transportation, agriculture, tourism, healthcare, education among others. NIFRA
has a joint investment from government and private sector and has an authorized
capital of NPR 40 billion of which paid up is NPR 12 billion. The bank is expected
to boost up the infrastructure needs as it is required to invest only in projects of
NPR 300 million or above.

7.1.4 Reporting Standards and NFRS for B and C Class FIs

In accordance with accounting principles of transparency, reliability, consistency
and comparability of financial statements, measures were undertaken to improve
the disclosures of BFIs. Effective from FY 2018/19, development banks and finance
companies are required to furnish their financial information based on Nepal
financial reporting standard (NFRS).

7.1.5 Risk Management Guidelines, 2018

In recent years, following the global financial crisis, risk management issues have
received increasing attention of international supervisory bodies. Following the
global financial crisis of 2007, risk management in financial institutions moved from
a compliance driven function toward a top-level comprehensive activity relevant at
the highest levels of decision making and strategy setting. While the extent of risk
management function performed and structure kept in place depend on the size and
complexity of individual financial institution, risk management is most effective
when basic principles and elements of risk management are applied consistently
throughout the financial institution.
Along with the objective of maintaining soundness and stability of financial
institution, some of the other objectives of NRB in publishing these guidelines are:
• To promote better risk culture at all levels of the financial institution.
• To provide minimum standards for risk management practices.

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Financial Sector Policies and Infrastructures

• To improve financial soundness of individual financial institutions and there

from the stability of the overall financial sector.
• To encourage financial institutions to adopt and implement a sound risk
management framework. To introduce important risk management tools and
techniques for assessment and necessary treatment of various risks.

7.1.6 Strengthening anti-money laundering measures

To combat money laundering and financing of terrorism, GON and NRB have
put forward some provisions relating to reporting and monitoring. Anti-money
laundering measures are primarily guided by Money Laundering Prevention
Act, 2008, and anti-money laundering prevention rules of 2073. Apart from
these, NRB issues circulars and directives from time to time to discourage
such activities. The policy provision made by NRB mandates on BFIs to put in
place a AML/CFT related policy covering procedures and guidelines relating
to identification, verification of suspicious and threshold transactions and
monitoring and tracing concerned transactions. Similarly, it also guides on
issues such as politically exposed person (PEP) and beneficial owner (BO),
guides on enhanced customer due diligence (ECDD) and other transaction
related provisions.
Moving forward, NRB has mandated commercial banks to start reporting via.
go-aml-production live environment effective from 3rd quarter of FY 2019/20.
Development banks and finance companies have to start reporting on such system
from the start of FY 2077/78.

7.1.7 Access to Finance

To improve the general public’s access to finance, NRB has adopted policy measures
to improve the supply side of financial services. A campaign was announced in the
monetary policy of FY 2018/19 of opening a bank account for every citizen. To
improve the access in the local body, NRB allotted A class banks to open branches
in all local bodies. The accessibility of banking hence increased and reached 735
local bodies in the review period.

7.1.8 Corporate Social Responsibility

There is a mandatory provision requiring banks to create a corporate social
responsibility fund and set aside one percent of profit for corporate social

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 Financial Sector Policies and Infrastructures

responsibility (CSR). Some of the areas where money collected in CSR fund could
be utilized are: education, health, natural disaster management, environmental
conservation, cultural promotion, rural infrastructure upgradation, capacity
enhancement for income generation of people belonging to socially backward
communities, enhancing financial literacy and consumer protection. The money
could also be extended to cover education and healthcare expenses of the poor or
build infrastructure of organizations working to promote interests of the poor. The
money could also be used to build child day care centers at banks and financial
institutions or extend direct or indirect financial support to help Nepal achieve 17
Sustainable Development Goals. As directed by NRB, the money collected in the
CSR fund, however, should not be spent on activities aimed at promoting the brand
of banks and financial institutions, or to serve individual and political interests of
board directors. In FY 2018/19 NRB directed banks to allocate at least10 percent
of the total CSR fund in each province.

7.2 Measures undertaken by NRB to maintain financial stability

Since the publication of last stability report, a number of stability measures have
been undertaken by NRB. Some of them are outlined below:
• Human resource development is seen as key to improve the performance and
resilience of banks. Hence, banks were mandated to provide training to the
staffs (assistant to officer level) compulsorily. New entrants must be given the
training within 2 years of their joining date.
• With the rapid increase in use of information technology in payments and
settlements, there have been concerns regarding the security of banking system.
Hence, Banks are required to conduct system audit.
• From FY 2018/19, banks are required to obtain tax clearance certificate/
e-statement before approving or renewing loan to any firms/companies.
• Statutory liquidity ratio was decreased from 12 percent to 10 percent for
commercial banks. Such ratio was reduced to 8 and 7 percent for development
banks and finance company from 9 and 8 percent, respectively.
• Interest spread for commercial banks have to be limited below 4.5 percent
effective from the beginning of FY 2019/20. For development banks and
finance company, Interest rate spread is to be maintained at 5 percent from the
beginning of FY 2019/20

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Financial Sector Policies and Infrastructures

• Banks have to limit their exposure of deposit of a single entity to 15 percent of

total deposit. Such ceiling was 20 percent previously.
• Priority sector lending by banks have been set at 25,15 and 10 percent for class
A, B and C, respectively, but commercial banks now have to lend at least 10
percent to agriculture sector and 15 percent to energy and tourism sector.
• Banks have to get accredited from an international or national credit rating
agency from FY 2018/19.
• Banks were allowed to issue debentures up to the limit of 100 percent of their
core capital. Earlier banks were allowed to issue debentures worth 50% of their
core capital.
• Loan-to-value ceiling for margin lending was increased to 65 per cent from
50 per cent. In conjunction to this, the risk weights for such kind of loan were
assigned 100 percent from 150. The ceiling of margin lending for Banks and
financial institutions is fixed at 25% of core capital, which was 40 percent
previously. Similarly, banks were allowed to establish subsidiary brokerage
firm, provided they have at least 51 percent stake in them.

76
 Annex-I
Statement of Assets and Liabilities of Banks & Financial Institutions (Aggregate)
(In Million Rs.)
Mid-July
Liabilities 2016 2017 2018 2019 % Change
1 2 3 4 2/1 3/2 4/3
1 CAPITAL FUND 214,892.48 308,651.74 370,014.44 446,402.47 43.63 19.88 20.64
a. Paid-up Capital 163,370.74 225,313.64 282,196.04 305,884.91 37.92 25.25 8.39
b. Statutory Reserves 43,680.58 53,665.23 63,755.69 76,174.07 22.86 18.80 19.48
c. Retained Earning (11,166.95) (3,005.23) (1,931.93) 4,538.02 (73.09) (35.71) (334.90)
d. Others Reserves 19,008.11 32,678.11 25,994.64 59,805.48 71.92 (20.45) 130.07
2 BORROWINGS 42,822.19 31,800.16 35,452.57 90,729.26 (25.74) 11.49 155.92
a. NRB 6,855.13 7,094.37 12,121.92 22,927.12 3.49 70.87 89.14
b. "A"Class Licensed Institution 20,083.07 9,094.04 8,582.53 34,285.55 (54.72) (5.62) 299.48
c. Foreign Banks and Fin. Ins. - - - 3,298.50 - - -
d. Other Financial Ins. 5,111.62 5,299.38 2,435.75 3,283.23 3.67 (54.04) 34.79
e. Bonds and Securities 10,772.37 10,312.37 12,312.37 26,934.86 (4.27) 19.39 118.76
3 DEPOSITS 2,107,502.69 2,384,806.95 2,836,930.01 3,354,427.87 13.16 18.96 18.24
a. Current 185,135.30 204,360.95 256,808.59 311,505.36 10.38 25.66 21.30
b. Savings 875,419.91 816,572.17 947,024.22 1,060,515.82 (6.72) 15.98 11.98
c. Fixed 617,634.95 998,258.72 1,229,730.70 1,526,497.38 61.63 23.19 24.13
d. Call Deposits 401,829.34 333,350.39 367,596.88 417,390.12 (17.04) 10.27 13.55
e. Others 27,483.20 32,264.72 35,769.62 38,519.20 17.40 10.86 7.69
4 Bills Payable 3,927.13 2,219.17 3,108.92 2,309.25 (43.49) 40.09 (25.72)
5 Other Liabilities 206,694.45 224,201.08 263,876.38 303,249.45 8.47 17.70 14.92
1. Loan Loss Provision 48,593.77 52,553.17 55,008.99 54,893.33 8.15 4.67 (0.21)
2. Interest Suspense a/c 32,000.69 34,891.97 37,704.55 20,271.09 9.04 8.06 (46.24)
3. Others 126,099.99 136,755.94 171,162.84 228,085.03 8.45 25.16 33.26
6 Reconcillation A/c 13,817.41 2,358.50 4,265.20 15,556.11 (82.93) 80.84 264.72
7 Profit & Loss A/c 49,443.18 54,882.04 61,337.97 73,518.78 11.00 11.76 19.86
TOTAL 2,639,099.54 3,008,919.66 3,574,985.48 4,286,193.20 14.01 18.81 19.89
Assets
1 LIQUID FUNDS 385,746.01 423,242.12 439,298.52 466,278.56 9.72 3.79 6.14
a. Cash Balance 56,937.25 64,372.60 74,892.95 92,563.12 13.06 16.34 23.59
Nepalese Notes & Coins 55,937.33 63,282.78 72,207.99 84,640.15 13.13 14.10 17.22
Foreign Currency 999.92 1,089.82 2,684.96 7,922.98 8.99 146.37 195.09
b. Bank Balance 262,419.81 305,795.05 298,098.38 295,862.06 16.53 (2.52) (0.75)
1. In Nepal Rastra Bank 180,498.18 233,256.83 218,135.41 215,138.12 29.23 (6.48) (1.37)
2. "A"Class Licensed Institution 41,730.30 38,882.05 41,054.74 29,035.70 (6.83) 5.59 (29.28)
3. Other Financial Ins. 8,437.01 6,368.76 7,556.64 13,009.76 (24.51) 18.65 72.16
4. In Foreign banks 31,754.32 27,287.42 31,351.59 38,678.47 (14.07) 14.89 23.37
c. Money at Call 66,388.94 53,074.46 66,307.19 77,853.38 (20.06) 24.93 17.41
2 INVESTMENTS 238,675.86 232,706.63 331,231.04 375,402.17 (2.50) 42.34 13.34
a. Govt.Securities 196,070.31 214,380.95 295,853.80 374,262.09 9.34 38.00 26.50
b Others 42,605.55 18,325.68 35,377.25 1,140.08 (56.99) 93.05 (96.78)
3 SHARE & OTHER INVESTMENT 131,777.67 129,938.39 109,664.75 186,189.49 (1.40) (15.60) 69.78
4 LOANS & ADVANCES 1,669,203.04 1,976,879.74 2,419,841.87 2,910,510.65 18.43 22.41 20.28
a. Private Sector 1,542,024.97 1,923,942.40 2,355,915.45 2,819,278.66 24.77 22.45 19.67
b. Financial Institutions 121,291.82 44,543.48 58,055.79 86,055.92 (63.28) 30.34 48.23
c. Government Organizations 5,886.25 8,393.85 5,870.64 5,176.07 42.60 (30.06) (11.83)
5 BILLS PURCHASED 11,601.52 17,198.72 2,955.87 3,459.14 48.25 (82.81) 17.03
6 LOANS AGT. COLLECTED BILLS 1,075.28 570.71 128.63 - (46.92) (77.46) (100.00)
7 FIXED ASSETS 35,044.21 40,633.93 47,763.06 71,419.84 15.95 17.54 49.53
8 OTHER ASSETS 144,135.22 166,139.11 206,833.99 253,948.55 15.27 24.49 22.78
a. Accrued Interests 34,038.25 37,665.70 43,308.52 46,171.39 10.66 14.98 6.61
b. Others 110,096.97 128,473.40 163,525.47 207,777.17 16.69 27.28 27.06
9 Expenses not Written off 319.21 279.01 264.06 26.42 (12.59) (5.36) (89.99)
10 Non Banking Assets 4,797.21 4,465.45 4,614.27 5,715.65 (6.92) 3.33 23.87
11 Reconcillation Account 16,089.93 16,631.18 12,388.71 13,167.24 3.36 (25.51) 6.28
12 Profit & Loss A/c 634.40 234.67 0.72 75.47 (63.01) (99.69) 10,417.22
TOTAL 2,639,099.55 3,008,919.66 3,574,985.49 4,286,193.19 14.01 18.81 19.89
 Annex-II
Profit and Loss Statement of Banks & Financial Institutions (Aggregate)
(In Million Rs.)
Mid-July
2016 2017 2018 2019 % Change
1 2 3 4 2/1 3/2 4/3
1 Interest Expenses 64,943.04 97,850.70 167,966.94 212,129.40 50.67 71.66 26.29
1.1 Deposit Liabilities 63,252.25 95,608.58 165,253.99 208,274.00 51.15 72.84 26.03
1.1.1 Saving A/c 21,234.79 23,525.99 39,005.05 48,101.58 10.79 65.80 23.32
1.1.2 Fixed A/c 31,710.65 55,650.88 112,317.02 143,530.33 75.50 101.82 27.79
1.1.2.1 Upto 3 Months Fixed A/c 1,914.75 2,495.80 8,397.90 8,211.49 30.35 236.48 (2.22)
1.1.2.2 3 to 6 Months fixed A/c 1,240.54 2,672.64 6,798.97 10,805.65 115.44 154.39 58.93
1.1.2.3 6 Months to 1 Year Fixed A/c 15,369.26 29,697.33 57,784.49 72,244.36 93.23 94.58 25.02
1.1.2.4 Above 1 Year 13,186.09 20,785.12 39,335.65 52,268.83 57.63 89.25 32.88
1.1.3 Call Deposit 10,301.47 16,429.74 13,817.98 16,374.37 59.49 (15.90) 18.50
1.1.4 Certificate of Deposits 5.34 1.97 113.93 267.72 (63.14) 5,683.67 134.99
1.2 Others 1,690.79 2,242.12 2,712.96 3,855.40 32.61 21.00 42.11
2 Commission/Fee Expense 546.23 600.94 612.76 1,668.49 10.02 1.97 172.29
3 Employees Expenses 22,715.53 26,627.48 31,472.44 39,311.85 17.22 18.20 24.91
4 Office Operating Expenses 18,123.58 20,754.59 25,516.90 29,456.13 14.52 22.95 15.44
5 Exchange Fluctuation Loss 197.03 108.69 125.33 35.14 (44.83) 15.31 (71.96)
5.1 Due to Change in Exchange Rates 182.01 88.16 102.33 26.26 (51.56) 16.08 (74.34)
5.2 Due to Foreign Currency Transactions 15.02 20.54 23.00 8.88 36.73 12.00 (61.39)
6 Non-Operatiing Expenses 106.14 33.54 58.45 163.71 (68.40) 74.28 180.08
7. Provision for Risk 9,649.95 12,762.76 15,147.02 19,851.73 32.26 18.68 31.06
7.1 Loan loss Provision 8,451.80 11,477.45 12,874.70 19,032.37 35.80 12.17 47.83
7.1.1 General Loan loss Provision 5,107.97 7,035.80 6,484.42 8,358.44 37.74 (7.84) 28.90
7.1.1.1 Pass Loan Loss Provision 4,530.40 6,256.87 5,678.68 6,457.38 38.11 (9.24) 13.71
7.1.1.2 Watch List Provision 577.57 778.93 805.74 1,901.07 34.86 3.44 135.94
7.1.2 Special Loan Loss Provision 3,028.49 4,375.25 6,216.13 9,622.67 44.47 42.07 54.80
7.1.3 Additional Loan Loss Provision 315.34 66.40 174.15 1,051.26 (78.94) 162.29 503.65
7.2. Provision for Non-Banking Assets 1,012.22 1,053.41 1,255.16 481.16 4.07 19.15 (61.67)
7.3. Provision for Loss on Investment 14.53 185.90 715.51 146.75 1,179.20 284.90 (79.49)
7.4. Provision for Loss of Other Assets 171.40 46.00 301.66 191.45 - - (36.53)
8 Loan Written Off 355.03 996.12 971.19 917.47 180.57 (2.50) (5.53)
9 Provision for Staff Bonus 5,851.53 6,656.78 7,981.80 8,856.79 13.76 19.90 10.96
10 Provision for Income Tax 17,591.64 20,370.63 24,582.73 30,504.93 15.80 20.68 24.09
11 Others 61.16 55.62 28.87 20.50 (9.06) (48.09) (28.98)
12 Net Profit 49,004.93 54,665.43 61,337.25 74,229.60 11.55 12.20 21.02
TOTAL EXPENSES 189,145.80 241,483.28 335,801.69 417,145.74 27.67 39.06 24.22
Income
1. Interest Income 146,483.09 194,358.11 283,227.23 359,819.98 32.68 45.72 27.04
1.1. On Loans and Advance 138,782.71 181,923.38 265,445.85 335,598.08 31.09 45.91 26.43
1.2. On Investment 3,487.02 5,875.27 10,903.10 13,247.48 68.49 85.58 21.50
1.2.1 Government Bonds 3,005.11 4,830.38 9,359.75 11,868.28 60.74 93.77 26.80
1.2.2 Foreign Bonds 136.72 153.35 186.01 194.68 12.17 21.29 4.66
1.2.3 NRB Bonds 199.66 776.75 1,030.65 620.00 289.04 32.69 (39.84)
1.2.4 Deventure & Bonds 145.54 114.78 326.70 564.52 (21.14) 184.63 72.80
1.3 Agency Balance 589.35 1,021.51 987.51 1,063.54 73.33 (3.33) 7.70
1.4 On Call Deposit 2,513.39 3,475.05 3,927.59 6,393.62 38.26 13.02 62.79
1.5 Others 1,110.61 2,062.91 1,963.17 3,517.26 85.75 (4.83) 79.16
2. Comission & Discount 9,828.97 11,806.85 13,569.38 18,693.73 20.12 14.93 37.76
2.1 Bills Purchase & Discount 300.48 239.80 117.08 217.80 (20.20) (51.18) 86.03
2.2 Comission 8,074.48 9,864.84 11,380.96 15,684.71 22.17 15.37 37.82
2.3 Others 1,454.01 1,702.22 2,071.34 2,791.22 17.07 21.69 34.75
3 Income From Exchange Fluctuation 5,708.82 6,248.97 7,849.70 10,506.14 9.46 25.62 33.84
3.1 Due to Change in Exchange Rate 1,342.09 706.74 1,536.71 1,181.65 (47.34) 117.44 (23.10)
3.2 Due to Foreign Currency Trans. 4,366.73 5,542.23 6,312.99 9,324.49 26.92 13.91 47.70
4 Other Operating Income 9,123.21 10,772.31 13,392.38 15,375.80 18.08 24.32 14.81
5 Non Operating Income 4,775.86 3,783.15 2,491.29 792.37 (20.79) (34.15) (68.19)
6 Provision Written Back 11,550.65 12,883.40 14,545.42 10,302.46 11.54 12.90 (29.17)
7 Recovery from Written off Loan 1,276.09 1,504.14 672.99 994.82 17.87 (55.26) 47.82
8 Income from Extra Ordinary Expenses 231.44 108.16 53.31 634.55 (53.27) (50.71) 1,090.25
9 Net Loss 167.67 18.20 - 25.89 (89.14) (100.00) -
TOTAL INCOME 189,145.79 241,483.29 335,801.70 417,145.73 27.67 39.06 24.22
 Annex-III
Major Financial Indicators of Microfinance Financial Institutions
(In Million Rs.)
Mid-July
2016 2017 2018 2019 % change
Liabilities 1 2 3 4 2/1 3/2 4/3
1 CAPITAL FUND 8,684.93 12,592.83 17,420.21 25,503.40 45.00 38.33 46.40
a. Paid-up Capital 5,436.50 7,721.29 11,159.07 17,077.80 82.78 42.03 53.04
b. Statutory Reserves 1,214.82 1,747.60 2,450.93 3,531.26 132.25 43.86 44.08
c. Retained Earning 363.62 1,179.47 1,378.95 1,750.02 64.85 224.37 26.91
d. Others Reserves 1,669.98 1,944.47 2,431.26 3,144.31 35.47 16.44 29.33
2 BORROWINGS 52,434.42 66,772.73 87,706.95 126,378.12 87.95 27.35 44.09
a. NRB 91.14 554.80 2,069.52 1,701.16 (82.69) 508.74 (17.80)
f. Others 52,343.28 66,217.93 85,637.43 124,676.96 91.24 26.51 45.59
3 DEPOSITS 24,095.33 34,344.13 49,548.56 85,606.23 119.02 42.53 72.77
4 BILLS PAYABLE 0.76 1.99 1.32 75.28 - 163.52 5,591.09
5 OTHER LIABILITIES 7,205.02 10,366.32 13,551.50 23,664.48 90.74 43.88 74.63
a. Loan Loss Provision 1,345.57 1,716.06 2,390.75 4,013.07 62.23 27.53 67.86
b. Interest Suspense a/c 652.70 938.51 1,121.40 1,800.17 37.42 43.79 60.53
c. Others 5,206.75 7,711.75 10,039.35 17,851.24 110.54 48.11 77.81
6 RECONCILIATION A/c 5,031.93 5,779.85 3,480.31 5,192.15 362.41 14.86 49.19
7 PROFIT & LOSS A/c 3,318.19 3,907.17 4,038.70 6,608.23 125.15 17.75 63.62
Total 100,770.57 133,765.01 175,747.57 273,027.90 100.78 32.74 55.35
Assets
1 LIQUID FUNDS 11,096.17 12,497.71 16,314.24 19,246.27 54.05 12.63 17.97
a. Cash Balance 75.50 93.88 147.32 214.46 92.39 24.35 45.57
b. Bank Balance 6,327.04 6,243.28 9,189.76 13,398.03 70.51 (1.32) 45.79
c. Money at Call 4,693.64 6,160.55 6,977.16 5,633.79 35.93 31.25 (19.25)
2 INVESTMENT IN SECURITIES EXCEPT SHARES 38.73 42.73 42.73 311.89 (66.67) 10.33 629.98
3 SHARE & OTHER INVESTMENT 2,809.82 2,658.12 2,564.66 2,261.72 (2.92) (5.40) (11.81)
4 LOANS & ADVANCES 77,232.89 106,540.87 145,943.77 235,101.47 116.40 37.95 61.09
Institutional 19,194.27 24,131.09 30,596.92 38,954.85 94.60 25.72 27.32
Individual 58,038.62 82,409.78 115,346.85 196,146.62 124.73 41.99 70.05
5 FIXED ASSETS 961.14 1,219.24 1,471.88 2,106.88 53.92 26.85 43.14
6 OTHER ASSETS 3,598.17 4,766.06 5,735.32 8,552.06 44.77 32.46 49.11
7 EXPENSES NOT WRITTEN OFF 4.47 11.17 7.10 10.88 (52.58) 149.58 53.11
8 NON BANKING ASSETS - - - 1.34 - - -
9 RECONCILIATION A/c 5,017.27 5,959.49 3,608.95 5,390.65 362.34 18.78 49.37
10 PROFIT & LOSS A/c 11.91 69.64 56.58 44.73 (85.45) 484.89 (20.95)
Total 100,770.57 133,765.01 175,745.23 273,027.90 100.78 32.74 55.35
Profit & Loss A/c
Expenses
1 INTEREST EXPENSES 3,494.31 5,937.76 11,759.20 17,021.80 77.57 69.93 44.75
2 COMMISSION/FEE EXPENSES 0.01 0.21 3.12 6.69 (99.98) 2,474.30 114.61
3 EMPLOYEE EXPENSES 2,671.95 3,619.07 4,735.39 6,299.32 82.46 35.45 33.03
4 OFFICE OPERATING EXPENSES 1,505.00 1,231.78 1,594.42 2,358.20 206.23 (18.15) 47.90
5 NON OPERATING EXPENSES 4.81 0.80 9.27 62.89 - (83.33) 578.43
6 PROVISION FOR RISK 560.23 641.44 1,048.32 1,920.61 197.73 14.50 83.21
7 LOAN WRITTEN OFF - 2.97 0.82 4.64 (100.00) - 464.16
8 EXTRAORDINORY EXPENSES - 0.01 - 1.30 - - -
9 PROVISION FOR STAFF BONUS 314.96 518.61 546.76 861.36 207.19 64.66 57.54
10 PROVISION FOR INCOME TAX 946.11 1,561.02 1,663.47 2,544.76 212.89 64.99 52.98
11 NET PROFIT 3,374.46 3,901.54 4,013.38 6,248.96 135.06 15.62 55.70
TOTAL EXPENSES 12,871.83 17,415.23 25,374.17 37,330.52 114.55 35.30 47.12
Income
1. INTEREST INCOME 11,628.63 15,659.24 22,236.28 31,647.10 115.76 34.66 42.32
2. COMMISSION & DISCOUNT 286.71 409.62 546.27 804.88 119.13 42.87 47.34
3 OTHER OPERATING INCOME 684.42 1,000.22 2,048.87 3,738.78 124.52 46.14 82.48
4 NON OPERATING INCOME 34.47 50.76 142.21 176.22 (14.15) 47.24 23.91
5 PROVISION FOR WRITTEN BACK 222.11 241.31 364.35 935.81 151.48 8.65 156.84
6 RECOVERY FOR WRITE BACK 4.63 2.99 5.18 2.08 134.91 (35.39) (59.94)
7 INCOME FOR EXTRA ORDINARY EXPENSES 0.01 - 0.00 0.03 (88.62) (100.00) 712.18
8 NET LOSS 10.85 51.08 31.00 25.63 (75.15) 370.64 (17.32)
TOTAL INCOME 12,871.83 17,415.23 25,374.17 37,330.52 114.55 35.30 47.12
Miscellaneous Information
No. of Total Staffs 7,132.00 8,903.00 11,552.00 17,361.00 61.91 24.83 50.29
No. of Total Branches 1,378.00 1,895.00 2,448.00 3,629.00 60.05 37.52 48.24
No. of Total Centers 100,794.20 132,355.20 172,788.20 274,186.20 69.74 31.31 58.68
No. of Total Groups 366,540.40 455,206.20 562,425.20 926,624.60 25.43 24.19 64.76
No. of Total Passive Groups 4,601.00 4,942.00 5,762.00 9,565.00 (49.65) 7.41 66.00
No. of Total Members 1,898,891.00 2,338,046.00 2,856,380.00 4,327,991.00 17.77 23.13 51.52
No. of Total Passive Members 32,378.00 37,050.00 51,516.00 118,044.00 (51.27) 14.43 129.14
No. of Total Borrowers 1,296,303.00 1,576,155.00 1,853,417.00 2,679,016.00 17.62 21.59 44.54
No. of Total Overdue Borrowers 44,861.00 44,281.00 56,823.80 165,984.00 46.33 (1.29) 192.10
No. of Total Saving Members 1,873,431.80 2,368,499.80 3,010,165.93 4,323,956.80 56.32 26.43 43.65
Total Saving Amount (Rs million) 24,111.28 34,583.36 49,548.56 101,910.06 119.18 43.43 105.68
 Annex-IV
Sector wise, Product wise and Security wise Credit Flow from BFIs
(In Million Rs.)
Mid-July
2016 2017 2018 2019 % Change
Sectorwise 1 2 3 4 2/1 3/2 4/3
Agricultural and Forest Related 76,816.32 87,899.16 115,385.84 157,905.31 14.43 31.27 36.85
Fishery Related 1,980.46 2,328.51 2,725.01 4,215.51 17.57 17.03 54.70
Mining Related 3,404.03 3,950.19 5,033.27 7,313.23 16.04 27.42 45.30
Agriculture, Forestry & Bevarage Production Related 296,097.02 329,835.00 415,538.69 510,037.65 11.39 25.98 22.74
Construction 182,851.94 213,028.75 253,186.93 309,417.48 16.50 18.85 22.21
Electricity,Gas and Water 46,417.77 63,520.59 86,863.05 126,593.91 36.85 36.75 45.74
Metal Products, Machinary & Electronic Equipment & Assemblage 19,473.46 25,044.82 33,148.29 37,075.90 28.61 32.36 11.85
Transport, Communication and Public Utilities 67,489.25 76,264.31 83,254.65 93,129.08 13.00 9.17 11.86
Wholesaler & Retailer 374,322.54 436,442.74 532,010.61 615,309.45 16.60 21.90 15.66
Finance, Insurance and Real Estate 135,000.17 166,374.23 203,050.35 233,846.71 23.24 22.04 15.17
Hotel or Restaurant 54,426.26 66,900.15 91,145.89 122,122.50 22.92 36.24 33.99
Other Services 72,146.41 90,250.94 105,969.22 122,900.06 25.09 17.42 15.98
Consumption Loans 120,843.49 158,359.29 166,318.73 163,819.04 31.04 5.03 (1.50)
Local Government 1,654.98 1,568.65 1,553.54 1,569.10 (5.22) (0.96) 1.00
Others 228,955.74 272,881.84 327,742.30 406,641.86 19.19 20.10 24.07
TOTAL 1,681,879.83 1,994,649.17 2,422,926.38 2,911,896.78 18.60 21.47 20.18
Productwise
Term Loan 272,694.42 320,735.49 423,647.60 562,526.81 17.62 32.09 32.78
Overdraft 294,326.89 361,906.83 410,910.51 455,716.09 22.96 13.54 10.90
Trust Receipt Loan / Import Loan 72,678.07 64,530.02 113,868.62 127,215.69 (11.21) 76.46 11.72
Demand & Other Working Capital Loan 365,785.23 404,195.22 498,115.75 615,755.45 10.50 23.24 23.62
Residential Personal Home Loan (Up to Rs. 1.5 Crore) 142,815.41 168,383.92 201,681.80 237,959.11 17.90 19.77 17.99
Real Estate Loan 108,071.88 127,318.70 142,005.39 146,990.82 17.81 11.54 3.51
Margin Nature Loan 37,681.04 41,170.06 41,128.86 45,416.72 9.26 (0.10) 10.43
Hire Purchase Loan 110,094.35 150,400.06 171,054.03 180,956.55 36.61 13.73 5.79
Deprived Sector Loan 81,239.19 111,984.61 137,728.27 177,390.02 37.85 22.99 28.80
Bills Purchased 12,530.80 17,354.17 2,858.75 3,341.84 38.49 (83.53) 16.90
Other Product 183,962.55 226,670.09 279,926.81 358,627.69 23.22 23.50 28.11
TOTAL 1,681,879.83 1,994,649.17 2,422,926.38 2,911,896.79 18.60 21.47 20.18
Collateral wise
Gold and Silver 30,642.25 37,466.92 38,070.33 38,246.38 22.27 1.61 0.46
Government Securities 1,014.67 997.94 470.42 336.21 (1.65) (52.86) (28.53)
Non Governmental Securities 29,668.70 34,634.94 37,124.14 35,873.09 16.74 7.19 (3.37)
Fixed Deposit Receipts 10,553.39 22,175.52 18,557.51 24,098.87 110.13 (16.32) 29.86
Own 9,577.14 20,780.98 17,907.40 23,569.08 116.99 (13.83) 31.62
Other Licences Institutions 976.25 1,394.55 650.11 529.80 42.85 (53.38) (18.51)
Collateral of Properties 1,463,645.87 1,734,997.03 2,136,643.17 2,600,224.91 18.54 23.15 21.70
Fixed Assets 1,207,217.80 1,459,790.48 1,788,776.33 2,206,624.04 20.92 22.54 23.36
Current Assets 256,428.07 275,206.55 347,866.84 393,600.86 7.32 26.40 13.15
Against security of Bill 15,710.45 15,873.63 18,166.44 23,280.71 1.04 14.44 28.15
Domestic Bills 3,525.87 798.38 826.25 2,381.60 (77.36) 3.49 188.24
Foreign Bills 12,184.58 15,075.25 17,340.19 20,899.12 23.72 15.02 20.52
Against Guarantee 52,993.07 63,293.16 78,284.15 100,600.99 19.44 23.69 28.51
Government Guarantee 2,364.19 2,560.01 2,348.23 2,365.22 8.28 (8.27) 0.72
Institutional Guarantee 33,209.50 42,758.93 55,644.51 77,217.25 28.76 30.14 38.77
Personal Guarantee 4,054.12 5,340.32 6,080.54 5,845.79 31.73 13.86 (3.86)
Collective Guarantee 4,855.55 5,828.86 7,085.62 7,398.46 20.05 21.56 4.42
International Rated Foreign Bank's Guarantee 4,226.93 1,469.32 1,681.66 1,662.22 (65.24) 14.45 (1.16)
Other Guarantee 4,282.79 5,335.71 5,443.59 6,112.04 24.59 2.02 12.28
Credit Card 416.03 905.78 1,257.07 1,670.37 117.72 38.78 32.88
Others 77,235.40 84,304.25 94,353.16 87,565.25 9.15 11.92 (7.19)
TOTAL 1,681,879.83 1,994,649.17 2,422,926.38 2,911,896.78 18.60 21.47 20.18
Annex-V
 Annex-VI
Composition of Financial Stability Oversight Committee

Name and Designation Status

Mr. Chinta Mani Siwakoti, Deputy Governor Chairperson
Mr. Dev Kumar Dhakal, Executive Director, Banks and Financial
Institution Regulation Department Member
Mr. Mukunda Kumar Chettri, Executive Director, Bank Supervision
Department Member
Mr. Rishikesh Bhatta, Executive Director, Development Bank
Supervision Department Member
Dr. Gunakar Bhatta, Executive Director, Research Department Member
Dr. Prakash Kumar Shrestha, Executive Director, Micro-Finance
Promotion and Supervision Department Member
Mr. Bam Bahadur Mishra, Executive Director, Foreign Exchange
Management Department Member
Mr. Ramu Poudel, Acting Executive Director, Finance Company
Supervision Department Member
Mr. Revati Prasad Nepal, Executive Director, Payment Systems
Department Member
Mr. Kiran Pandit, Director, Banks and Financial Institutions Member
Regulation Department Secretary
Registrar, Department of Cooperative Invitee Member
Chairman, Insurance Board Invitee Member
Chairman, Security Board of Nepal Invitee Member
Administrator, Employee Provident Fund Invitee Member
Executive Director, Citizen Investment Trust Invitee Member
Related Sectors Experts (maximum 2) Invitee Member
 Composition of Financial Stability Sub-Committee
Name and Designation Status
Mr.Kiran Pandit, Director, Banks and Financial Institutions Regulation
Department Coordinator
Mr Sharan Kumar Adhikari, Deputy Director, Bank Supervision
Department Member
Ms. Sajana Silpakar , Deputy Director, Finance Company Supervision
Department Member
Mr. Nanda Kumar Dhakal, Deputy Director, Research Department Member
Mr. Krishna Sharan Phuyal, Deputy Director, Foreign Exchange
Management Department Member
Mr. Rajan Prasad Adhikari, Deputy Director, Microfinance Promotion
and Supervision Department Member
Mr. Rakesh Prajapati, Deputy Director, Development Bank Bank
Supervision Department Member
Mr. Kriti Bikram Dahal, Deputy Director, Payment Systems
Department Member
Dr. Deepak Adhikari, Deputy Director, Banks and Financial Member
Institutions Regulation Department Secretary
Mr. Prithu Sharma Binadi, Assistant Director, Banks and Financial
FSU
Institutions Regulation Department
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