The International Monetary Fund (IMF) and the World Bank (WB) are expected to soon
inform Nepal about the country´s enrolment in the Financial Sector Assessment Program, under which a comprehensive and in-depth analysis of Nepal´s financial sector will be conducted.
Once the acceptance letter is extended, the IMF and the WB will jointly field a mission to Kathmandu-possibly in the first half of 2014, the IMF official said. Nepal is being enrolled in the one-year program upon interest expressed by Nepal Rastra Bank, the central monetary authority, to get expert external opinion on strength and weaknesses of the domestic financial sector.
"After completion of the assessment program, we wish to get comprehensive information on the level of our compliance with international norms, financial sector´s ability to cushion shocks, status of deposit and credit portfolios, market practice and prudence adopted by the financial system," a high-ranking official of Nepal Rastra Bank told Republica on condition of anonymity
"If the review is good enough, donor agencies and countries would be willing to extend more development assistance. But even if the end-result does not meet our expectations, we are not obliged to make the report public so the country´s image won´t be tainted," the official further said, explaining that the latest program is completely different from the WB-led financial sector reform program which ended in December 2011.
The country´s impending enrolment in the financial sector assessment program comes at a time when the IMF, in a 2010 report, has identified systematic risks building up in the financial sector due to rapid credit expansion, which may adversely affect loan quality, real estate exposure of financial institutions accumulated from a real estate boom, and high liquidity risk with some banks experiencing stress.
Lately, problems seen in credit and savings cooperatives have also drawn attention. Recently, the Asian Development Bank said: "Any major shock to the deposit and lending practices of cooperatives, whose combined deposits and lending portfolios are larger than those of either development banks or finance companies, would likely harm the entire banking system and the economy."
The IMF has said a financial crisis in Nepal could cause GDP loss of 30 percent in the first four years before the growth recovers to the baseline trend. Amid this prediction, Nepal´s participation in the financial sector assessment program is expected to benefit Nepal as country´s that had enrolled in the program on the onset of global financial crisis were able to "mitigate some of the consequences of the crisis".
"The financial assessments provide countries with specific, actionable recommendations on how to reduce risk, improve supervision and strengthen crisis management. Countries are free to implement (these recommendations) or not, but the IMF follows up and monitors countries´ implementation," information posted on IMF´s website states.
These assessments generally include two components: a financial stability assessment, which is conducted by the IMF, and a financial development assessment, which is carried out by the WB.
Under financial stability assessment, IMF team examines soundness of the banking and other financial sectors, conducts stress test, rates the quality of banks and insurance companies, among others, and evaluates the ability of supervisors, policymakers and financial safety nets to respond effectively in cases of systematic stress, the IMF says in its website.
On the other hand, financial development assessment includes inspection of the quality of legal framework and financial infrastructure, identification of obstacles to the competitiveness and efficiency of the financial sector, and examination of financial sector´s contribution to economic growth and development, the IMF website further says. In 2013, 16 economies ranging from Vietnam, Barbados, Guatemala and Argentina to Singapore, Korea, Canada, the UAE and Switzerland were enrolled in the assessment program.