The seven-day study under Financial Sector Assessment Program (FSAP) of WB and IMF team identified that supervision of BFIs is compliance-based rather than risk-based. The study also found that compliance level in BFIs is also inadequate.
Lack of sufficient skilled staff members and inadequate IT infrastructure are the major factors that have been weakening the supervisory capacity of Nepal Rastra Bank (NRB) -- the financial sector regulator.
The preliminary study also identified the need for integration of on-site and off-site supervision of BFIs to consolidate supervision on them by the central bank.
A high-level source at the Ministry of Finance (MoF) told Republica that this is the first of its kind study in Nepal. In South Asia, such studies have already been conducted in India, Pakistan, Bangladesh and Sri Lanka.
The team made a presentation of its report at a meeting with experts, high-ranking government officials, officials from Nepal Rastra Bank, Securities Board of Nepal (Sebon), Insurance Board and Bankers, among others, on Sunday.
The team found that BFIs lack risk appetite approach -- a measure for financial risk management. It also said BFIs are focused more on setting target for more profits.
Similarly, the report has raised concern over lack of management of liquidity and contingent plans to avoid untoward financial problems within the organizations.
Compliance-based control system, which is an attempt to comply with the regulatory requirement as practiced in BFIs for internal controls, rather than risk-based control system is the other factor that risks financial stability.
After finding supervisory weakness for financial stability, the team is overseeing coherence of operations with exchange rate peg between Nepali rupee with Indian rupees, options for liquidity management, interest rate policy consistent with stability, and development of financial sector so as to attain price stability, financial stability, economic growth and credit growth.
The team also raised concern over mounting financial risk amid mushrooming of saving and credit cooperatives and lack of strong supervision and regulatory mechanism to govern them.
Liberal licensing policies adopted by the government has been identified as the key factor leading to growing number of saving and credit cooperatives in the country.
In the report, the team has pointed out host of policy challenges before the government to bring the cooperative sector on track. Establishing credible oversight arrangements, rigorous regulation and supervision in proportional to the size and membership base of cooperatives, imposing control in issuing new licenses for saving and credit cooperatives are among the major policy challenges, according to the report.
Similarly, the team has underlined the need for restructuring state-owned Rastriya Banijya Bank (RBB), Nepal Bank Ltd (NBL) and Agricultural Development Bank Ltd (ADBL) by restoring their financial soundness and commercial viability.
A source at the Ministry of Finance said the team will conduct follow-up study in February and March before preparing the final report in May.