Submit your Article

In recent weeks, the plights of borrowers of microfinance institutions (MFIs) have made numerous headlines. Particularly those who had availed loans from multiple MFIs have suffered badly after failing to repay the loans amid business losses and a decline in income due to the Covid-19 pandemic and economic slowdown in the country. But banks and financial institutions (BFIs) are now concerned about whether the cases of willful defaults will rise following the campaign launched by controversial businessman Durga Prasain against repaying the loans. Besides political demands for the restoration of the monarchy and Hindu nation status, Prasain has been demanding that the BFIs should waive loans up to Rs 2 million and reduce the interest rates. Bankers say with the slowdown in business activities, rising inflation, and high-interest rates, borrowers' ability to repay the loans has weakened and this has led to a surge in the number of 'blacklisting' of the people by banks and government authorities who are unable to repay the loans. According to bankers, due to the drastic slowdown in the real estate market, banks are not able to recover loans easily even through auctioning the real estate properties. "Small and medium enterprises, agricultural enterprises, hotels and tourism firms, schools/colleges, and companies in the construction sector are unable to repay their debts," said a banker. Prasain's campaign has alarmed the bankers. Issuing a joint statement on March 2, Nepal Bankers’ Association, Development Bankers Association Nepal, Nepal Financial Institutions Association, and Nepal Microfinance Bankers’ Association drew the government's attention amid threats and manhandling of the staff of BFIs by unidentified people. The associations said that calling not to repay loans and inciting violence will invite anarchy which would not benefit anyone in the country. According to them, it will further complicate the situation and affect economic activities. "It is the responsibility of borrowers to repay the principal amounts and interest of the loans they've availed. It is anarchy to refuse to settle the financial liabilities," reads a joint press release issued by the umbrella organizations of the BFIs. According to a senior official at the Nepal Rastra Bank, Prasain’s campaign could cause some of his followers to default on the loans. “But the ultimate victims of following such a campaign will be those who fail to repay the loans regularly,” the official said. “BFIs will recover their loans anyway because almost all the loans in the country have been provided against the collateral.” The NRB official claimed that Prasain has been making an effort to make his campaign a springboard to elevate his political ambitions but his followers who will be inspired not to pay the loans would suffer finally. “It may take some time to recover the loans, but BFIs will definitely recover the debts,” he said. While the debt default rate in Nepal is relatively low so far but the worrying sign is, the rise in the non-performing loans (NPLs) of the banks. As of mid-January, the NPLs of commercial banks stood at 2.54 percent while development banks' NPLs stood at 2.47 percent and finance companies at 5.79 percent. “NPL level of banks in Nepal is relatively lower compared to their South Asian peers,” the NRB official said. But the quality of loans has become a concern for the central bank as well as international agencies like the International Monetary Fund (IMF). The IMF’s Article IV consultation mission which concluded its visit last month has stated in its initial observation report that bank asset quality in Nepal has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima. “The discussions recognized the need for the Nepal Rastra Bank to ensure appropriate reclassification of loans and close monitoring of the impact of a potential deterioration in repayment capacity of borrowers,” the IMF said. Continuing to advance reforms on banking regulations and supervision and ensuring bank asset quality, and further strengthening NRB’s governance by amending the NRB Act in line with best international practices are the commitments Nepal made to the IMF to receive funding under the Extended Credit Facility (ECF). As international agencies like the IMF have been warning about the quality of the loans, the central bank is concerned that the campaign run by Prasain can cause an increase in debt defaults further. How the defaults affect the bank can be gauged from painful rehabilitation measures taken to rescue Rastriya Banijya Bank and Nepal Bank in the early 2000s. The credit rating agency ICRA Nepal in its recent report has also pointed out a looming challenge to the Nepali banking sector. "While the rise in NPAs during the first half of the financial year can be partly attributed to the industry seasonality, the ongoing challenges led by increased interest rates, erosion in the credit profile of the borrowers as discussed in earlier sections, the inability of the banks to extend credit facilities under a new regulatory regime, etc have exacerbated the liquidity concerns and weakened the debt-servicing ability of the borrowers; which could continue the pressure on banking sector asset quality going forward," reads the report. According to the report, the probable deterioration in asset quality of banks in subsequent quarters could result in the need for recapitalization, given the moderate capital cushion of many banks. “However, the ability of the banks to recapitalize through equity issuance could remain a challenge given the weak to moderate profitability outlook for the banking sector," states the report.  

The Nepal Stock Exchange (NEPSE) plunged by 30. 77 points to close at 1,938.25 points on Sunday. Similarly, the sensitive index dropped by 4. 86 points to close at 368. 70 points. A total of 3,832,459 unit shares of 259 companies were traded for Rs 1. 39 billion. Meanwhile, Super Madi Hydropower Limited was the top gainer today with its price surging by 10. 00 percent. Likewise, Samling Power Company Limited was the top loser with its price dropped by 10. 00 percent. At the end of the day, the total market capitalization stood at Rs 2. 80 trillion.

The price of gold has increased by Rs 300 per tola in the domestic market on Sunday. According to the Federation of Nepal Gold and Silver Dealers’ Association, the precious yellow metal is being traded at Rs 102, 800 per tola today. The gold was traded at Rs 102, 300 per tola on Friday. Meanwhile, tejabi gold is being traded at Rs 102, 300 per tola. It was traded at Rs 102, 000 per tola. Similarly, the price of silver has increased by Rs 10 and is being traded at Rs 1,275 per tola today.

The Asia Pacific Group (APG) on Money Laundering has pointed out several deficiencies of Nepal to comply with the standards on anti-money laundering and counter-terrorist financing (AML/CFT). This may lead to the 'graylisting' of Nepal by the Financial Action Task Force (FATF), a global anti-money laundering watchdog, a senior government official said. After concluding the field visit to Nepal in December last year as part of the mutual evaluation of Nepal’s compliance in December, the APG has prepared a report and shared it with Nepal. According to the government official who has seen the report, there are two types of non-compliances that the report has pointed out—legislation-related and implementation and supervision-related. The APG report has indicated the biggest weakness of Nepal in the enforcement of the laws. “The report has shown deficiencies in taking legal action against big fishes of corruption and other illegal activities,” the official said, adding, “It has also shown weakness in taking action against reporting entities, which are failing to comply with anti-money laundering measures.” APG presented its initial report to Nepal this month to seek the government's opinion on its assessment of Nepal’s degree of compliance with anti-money laundering standards. “It may take a week or so to send the reply,” the official said. In fact, most of the deficiencies related to the legislation pointed out by the APG are the same that the government itself had admitted. In order to plug the loopholes in the laws, an amendment bill covering various laws was registered in the previous parliament. Even though the erstwhile House of Representatives had endorsed the bill, it failed to send the law to the National Assembly which resulted in vacating the entire process. The government of Nepal has identified 15 laws that need to be amended to make them compatible with the FATF anti-money laundering standards. Some of the major laws that need amendment are the Assets Laundering Prevention Act 2008, Securities Act 2007, Human Trafficking, and Transportation (Control) Act 2008, Confiscation of Criminal Proceeds Act 2014, Land Revenue Act 1978, Tourism Act 1978, Mutual Legal Assistance Act 2014, Organized Crimes Prevention Act 2014, Criminal (Code) Act 2017 and Cooperative Act 2017. The previous government under Prime Minister Sher Bahadur Deuba had even forwarded an ordinance covering amendment proposals on these laws to President Bidya Devi Bhandari, but the latter didn’t authenticate it. The government formed after the November 20, 2022 parliamentary elections has again registered the Some Nepal Acts Amendment Bill to address these deficiencies. “If the new bill is passed, around 80 percent of deficiencies pointed out by the APG with regard to the legislation will be addressed,” said the official. “It will still not address the concerns related to real estate and extraditions.” According to the official, there should be a political consensus on addressing extradition-related issues. A face-to-face interaction is expected in April before the APG prepares its final report. The report will then go to the APG plenary, which will determine whether Nepal will be under the International Cooperation Review Group (ICRG) monitoring of the FATF. “There is still hope for Nepal if the parliament passes the registered bill,” said the official. “There will be room for improvement in the enforcement of laws as well to prevent graylisting.” According to the International Monetary Fund, the consequences of ‘graylist’ is a possible future blacklisting and loss of correspondent banking with many of the world’s major banks. Correspondent banking refers to agreements between banks to provide payment services for each other. After being on the ‘graylist’ in 2008, Nepal was close to being placed on the blacklist in 2012. This forced the country to introduce new laws, regulations, procedures, and a dedicated investigation unit, which helped Nepal to be delisted from the FATF ‘graylist’ in 2014.