This document summarizes the Financial Stability Report for 2014 published by Nepal Rastra Bank. It discusses the macroeconomic environment and performance of the financial system in Nepal. The banking sector is well-capitalized and profitable. Non-performing loans remain low although they increased slightly. The central bank is taking measures to ensure financial stability in line with Basel III standards and has developed frameworks for problem bank resolution and liquidity monitoring. Overall, the financial system remains stable but continued consolidation in the banking sector is needed to improve stability, intermediation, and access to finance.

1. Financial Stability Report (2014)
Presented By:
Dinesh Adhikari
Kiran Chaulagain
Nabin Mahatha
Saroj Shrestha
Suresh Karki

2. Introduction
• Based on the provisional data of
BFIs and other FIs as of mid July
2014
• Covers the development and risks
during the year to mind July 2014.
• Published by NRB, Central Office,
Banks and Financial Institutions
Regulation Department, Financial
Stability Unit.
• Aims to share information and
ensure in the functioning of the
financial system.
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3. Macroeconomic Development
• Global Growth is projected to rebound and the strongest
rebound in growth is expected in the United States
• Inflation will remain central bank targets and advanced
economies.
• Inflation is projected to increase gradually as the recovery
strengthens and output gaps slowly decrease in the euro
area.
• Crude oil prices started to drop form 111.8 dollar a barrel
from June 2014 to reach 87.43 in August.
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4. Domestic Macro economic
development.
Real GDP at basic price grew by 5.2 percent in 2013/14 compared to a
growth of 3.5 percent in the previous year.
The growth rate of the agriculture and the non agriculture sectors were
4.7 percent and 5.3 percent, respectively in 2013/14.
The annual average CPI increased by 9.1 percent in 2013/14 compared to
an increase of 9.9 percent in the previous year.
BOP has surplus of Rs. 127.1 billion.
Nepalese currency remained fairly stable during the later months of the
fiscal year.
Excess liquidity in BFIs was mopped up through OMOs in the review
period.
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5. Financial System Performance and
Stability
oReport depicts that the global banking system is now better capitalised
oNRB regulates commercial banks, development banks, finance
companies, micro finance financial institutions, FINGOs and
cooperatives carrying limited banking activities.
oRecently, banking system of Nepal is experiencing an encouraging
restructuring and consolidation, particularly through the merger and
acquisition
oA high level committee to enhance financial stability through improved
coordination between regulators, comprising NRB, SEBON, Insurance
Board, Department of Cooperatives, office of the Company Registrar has
been recently established.
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6. Number of BFIs and other
institutions.
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7. Financial Highlights
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8. Asset structure of Banks
21.6
19.7
10.5
8
7.7
4.3
Loans & advances in %
Wholeseller & retailer
Manufacturing
Constructon
Real estate
Consumption
Agriculture & Forestry
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9. Liability Structure Of Banks
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10. NPL and LLP ratio
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11. CD Ratio
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12. Profitability
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13. • Financial soundness indicators show that the banking system
performing well during the year 2013/14.
• Capital fund of BFIs increased by Rs. 14.1 billion.
• Deposits in BIFs grew by 18.2 percent.
• The overall profitability of banking sector increased by 13.0
percent.
• The overall CAR of BFIs in mid-July 2014 was 12.7 percent which
was 13.2 percent in previous year.
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14. Performance of Commercial
Banks
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15. Stress testing
Credit shock
Stress test results
shows that there is
growing risk in credit
among commercial
banks.
Liquidity shock
Results from stress tests
under liquidity shock shows
that encouraging
improvements in liquidity
resilience among
commercial banks.
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16. Co- Operatives
Cooperatives are supposed to be a helping hand in expanding and
deepening financial access in rural areas of the country.
Nepal Rastra Bank had licensed some cooperatives to carryout
limited banking function in 1990s.
As of mid-Jul 2014, 15 cooperatives are carrying out limited-
banking activities.
Co-operatives have emerged as one of the major pillar of the
economic as well as financial sector of the country.
Cooperatives have been mobilizing huge amount of deposits and
credits that equals to around 10.0 percent of total deposits and
credits.
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18. Financial Markets
Global Financial and Money Market Perspective
•In order to stabilize financial crisis, Federal
Reserve took extraordinary actions
–Reducing short term interest rate almost to zero
–Reducing long term interest rate
–Purchased large number of treasury securities
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19. Domestic Financial Market
Money Market
• Short term interest rate remained low with weighted average 91-day
Treasury bill rate stood at 0.02%
• Weighted average inter bank rate among commercial banks declined to
0.16% from 0.86%
• Inter bank rate among other financial institution declined to 2.40% from
5.03%
• As per the modified method of spread rate calculation, the weighted
average interest rate spread of commercial banks stood at 5.2 percent
• The average base rate of commercial banks remained at 8.4 percent in
mid-July 2014 compared to 9.8 percent a year ago.
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20. Securities Market
• After second Constituent Assembly Election, there is improvement
in securities market
• NEPSE index increased by 99.9% to 1035.1 points & sensitive index
at 222…….5 points as against 130.3 points
• Market capitalization increased by 105.5 points with contribution
of 30.4 % in GDP
• Total piad up capital of listed comapanies stood at 146.5 billion
with annual growth of 16.2 %
• Commercial bank’s bond of RS 2.3 billion was also listed at NEPSE
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21. Foreign Exchange
• Gross FOREX reserves increased by 24.8%
• NRB’s reserve increased by 26.4%
• Convertible FOREX reserves increased by 22.9%
• Inconvertible FOREX reserves increased by 23.4%
• The existing level of reserves is sufficient for financing
merchandise imports of 11.5 months & merchandise
and service imports of 10 months
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22. Policies And Infrastructures
• Problems in the regulation and management of financial
institutions across the world
In 2014, FSB focused on completing the core aspects of the four
fundamental areas of the G20 led international financial
regulatory reforms
 Building resilient financial institutions by fully
implementing the Basel III capital standards
Ending too big to fail
Addressing shadow banking through increasing regulations
and
Making derivatives market safer.
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23. Continue…
• Basel I and II only concentrated to the capital not with liquidity.
• NRB has developed its own liquidity monitoring framework for the
short-term liquidity monitoring of the banks
• Nepalese commercial banks will be fully compliant with the Basel III
regulations by 2019 starting early 2015.
• BFIs has to maintain CRR and SLC within NRB.
• Developed "Problem Bank Resolution Framework (PBRF)“
• Auction-based repo, reverse repo, outright sale, outright purchase,
deposit collection and NRB bonds is used as instruments for regular,
fine tuning and structural OMOs.
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24. • Risk based supervision
• Special inspection of financial institution
• Diagnostic review
• Merger & Acquisition Bylaws
• Financial Literacy
• Payment and Settlement Reforms
•Monetary policy
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25. Summary and Recommendation
• Nepalesefinancialsystemhasbeenregulatedbydifferentindependent
regulators
• Aimstoshareinformationandensuretransparencyinthefunctioningofthe
financialsystem.
• Thecentralbankistakingthenecessarymeasurestoensurethe
implementationofBaselIIIprovisionsforfinancialstability.
• Developed"ProblemBankResolutionFramework"whichspellsoutthe
detailpoliciesandproceduresforidentificationofproblembankandfinancial
institutions.
• Thebankingsectorneedstoconsolidatetoimproveitsfinancialstability,its
intermediationfunction,andaccesstofinance.
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26. Continue…
• NRB should be careful in order to implement the policies
adopted by globally, because Nepalese market is not as par
with developed countries.
• NRB should focus on research and development to implement
better policy for BFIs.
• BFIs has to be more transparent in terms of financial
highlights.
• Transparency and disclosure of data and good governance is
major factor for financial stability of Nepal.
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