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Regulation and Supervision of Banks and Financial Institutions in Nepal

Regulation and Supervision of Banks and Financial Institutions in Nepal. Dirgha Rawal Bank Supervision Department. Nepalese Financial System At a glance. Other Financial Institutions regulated by GoN. BFIs Regulated by Nepal Rastra Bank. Commercial Banks 32. Financial

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Regulation and Supervision of Banks and Financial Institutions in Nepal

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  1. Regulation and Supervision of Banks and Financial Institutionsin Nepal Dirgha Rawal Bank Supervision Department

  2. Nepalese Financial System At a glance Other Financial Institutions regulated by GoN BFIs Regulated by Nepal Rastra Bank Commercial Banks 32 Financial Institutions DCGC EPF CIT Insurance Board SEBON Insurance Co. 25 NEPSE Development Bank 89 Finance Companies 76 Cooperatives 16 FINGOs 37

  3. Number of Banks & Financial InstitutionsLicensed by NRB *MFDB Micro Finance Development Banks Cooperatives licensed to carry limited banking transaction NGOs licensed to carry financial intermediation

  4. TOTAL ASSETS Mid Jan 2012 BFIs Nos Amount Shares% Commercial Banks 32 US$11.9 biliion 78.29% Development Banks 89 US$1.7 billion 11.18% Finance Companies 79US$1.6 billion10.53% 200 15.2 billion 100%

  5. Key Indicators of Commercial Banks Mid April 2012 Total Deposit : Rs 792 billion Total Credit : Rs 589 billion Real estate loan as a percentage of total loan : 11.93% Total Assets : Rs 933 billion Deposit guaranteed by DCGC : 194.40 billion Deposit guarantee limit is up to Rs 2,00,000 (USD 2800) per individual depositor

  6. Legal Provisions • Nepal Rastra Bank Act 2002. • Bank and Financial Institutions Act 2006. • Company Act 2006. • Anti Money Laundering Act. • Inspection and Supervision Byelaw. • Prompt Corrective Action Byelaw • Off-site Supervision Manual. • Onsite Inspection Manual. • Unified Directives. • Directives on Capital adequacy, Loan Classification, Single Obligor limits, Corporate Governance etc.

  7. Legal Authority of NRB • As stated in NRB Act, 2002: Function of NRB “Issue license to Bank and FIs to carry out banking and financial business, and to regulate, inspect, supervise and monitor such transactions” • NRB Act, 2002, Article 78, institutions which involve in financial transactions should get license from NRB. NRB has right to put the conditions while issuing the licensing. • NRB Act, 2002, Article 84, NRB has the authority to conduct supervision of Banks and financial institutions. • BAFIA 2006, Article 3 & 4 • NRB issues Licensing policy, directives and circulars accordingly.

  8. NRB Regulation and Supervision • NRB Regulates and Supervises the Banks and Financial Institutions licensed by NRB. • There are separate departments for the supervision of each type of BFIs. • Bank Supervision Department for the supervision of Commercial Banks • Development Banks Supervision Department for the Supervision of Development Banks • Finance Company Supervision Department for Finance Companies • Micro-finance Promotion and Supervision Department

  9. Classification of Bank & Financial Institutions BAFIA, 2006 Article 47 has classified financial institutions and permissible activities as: • “A” class licensed institution (Commercial Banks) • “B” class licensed institution (Development Banks) • “C” class licensed institution(Finance Company) • “D” class licensed institution(Micro-finance Development Banks)

  10. Capital Structure : Licensing Criteria • Commercial Banks Rs 2 Billion • Development Banks Rs 640 Million (National Level) • Finance Companies Rs 200 Million(National Level) • Micro-Finance Development Banks Rs 100Million(National Level) Minimum Capital Adequacy Requirements • Tier I CapitalTotal Capital • Commercial Banks (Basel II) 6% 10% • Development Banks 5.5% 11% • Finance Companies 5.5% 11% • Micro-Finance Development Banks 4% 8%

  11. Minimum Paid up capital (Rs. Million)

  12. Capital Structure • Promoter should hold at least 51 % of share and At least 30 % of share should be allocated for general public • Foreign participation; minimum 20% & maximum 85 % of paid up capital • Borrowed fund should not be used for bank capital • Cross holding is not allowed. One BFI can not invest in the share of other BFIs licensed by NRB. • Maximum limit to invest in one BFI is 15 % of paid up capital. Single group, individual or a family can not invest beyond this limit in one BFI.

  13. Basel II in Commercial Banks • New Capital Adequacy Framework has been implemented since July 2008. The framework is under parallel run for development banks. Three Pillar Approach • Minimum Capital Requirements Credit Risk : Simplified Standardized Approach Market Risk : Net Open Position Approach Operational Risk : Basic Indicator Approach • Supervisory Review • Disclosure

  14. Basel II • Banks are required to maintain minimum Capital Adequacy Ratio on the basis of Total Risk Weighted Exposures. Total Risk Weighted Exposure includes RWE for Credit Risk, Market Risk and Operational Risk. • Under Supervisory Review Process, NRB reviews the bank’s capital adequacy assessment process. In case of any remarks, there is a list of predefined action as a Supervisory Response. NRB can make addition in RWE and deduction in Capital as a supervisory Response. • Banks and financial institutions are required to disclose minimum information to the public. Disclosure requirements includes publication of quarterly and annual financials to general public.

  15. Onsite Inspection • Corporate Level Inspection • at least once a year • Branches are selected on the basis of risk exposure. • Special Inspection • (As and when required) • Targeted Inspection • (Targeting specific issue/sector of the BFIs)

  16. Corporate level (Full-Fledged) Inspection • Inspection is carried out in corporate level • Each and every area of banking activities. • More Focus on credit . At least, 40% of total credit(amount) and 10 % of number of files are taken as a sample. • Pre-inspection planning, Policy Review and Pre-information for inspection. • Post inspection : Exit meeting; Management discussion • Onsite inspection reports of Commercial banks and National level Development banks are discussed at BoD of NRB before sending to concerned BFI.

  17. Targeted/Special Inspection • This type of inspection is conducted on the basis of some information. • Under special inspection, there is no specific plan for inspection. This can be issue specific; • Targeted inspections are targeted to the functional area of the BFI. • Eg. Inspection of L/C, Guarantee, remittance etc

  18. Off-site Supervision Performs Financial Analysis and Compliance Test of Bank/FIs on the basis of various financial and other information provided by Bank/FIs – Section 7(4) of I/S Byelaws. Off-Site Supervision: Off-Site supervision is conducted on the basis of financial returns received from the Banks. Inputs/Resources: Periodic financial and other information provided by Bank/FIs. Daily, Weekly, Monthly, Quarterly, Half yearly, Yearly.

  19. Off-site SupervisionFinancial Analysis Tools used on offsite analysis • Ratio Analysis. • CAELS Rating • Trend Analysis. • Comparisons: • Comparison with previous period figures. • Comparison with PEER Group Average (PGA). • Comparison with industry average.

  20. Off-site Supervision - Scope • Financial Analysis – Quarterly. • CAELS Rating • Compliance Review – Quarterly. • Weekly Cash Reserve Ratio (CRR) • Deprived Sector Lending (DSL) • Monthly Capital Adequacy Monitoring • Monthly Statutory Liquidity Ratio (SLR • Consolidated Off-site Report – Quarterly. • Annual Off-site Report – Annually. • Permission to publish the financial statements • Enforcement Report – Quarterly.

  21. Recent Developments • Forward Looking analysis ; • Early Warning Signals (EWS) • Based on CAELS. • Prompt Corrective Action(PCA) • PCA based on the CAR. Liquidity PCA are under process of development. • Stress Testing (Sensitivity analysis of commercial banks on a quarterly basis) • Liquidity Monitoring Framework • Liquid assets to Short-term liabilities Ratio – similar to Liquidity Coverage Ratio of Basel III

  22. Future Agenda • Problem Bank Resolution Framework • Under Development phase. • Framework development under the technical assistance of World Bank. • Risk Based Supervision Framework • Under Development phase. • Framework development under the technical assistance of IMF.

  23. Issues and Challenges • Capital level of state owned bank. • Nepal Bank Limited and Rastriya Banijya Bank, two state owned banks, are the banks with negative capital fund. • Ensuring Corporate Governance. • Some development banks and financial institutions were declared problem bank because of issues in corporate governance • Supervision is Largely Compliance Based. • Lacking uniformity in compliance issues.

  24. Issues and Challenges • Strengthening Follow up and Monitoring. • Successful departure from current state of “large number of small banks” to “small number of large banks” (Merger and Acquisition) • Developing Supervisory Capacity. • Adopting and implementing international best practices. • Implementation of Basel core principles • Moving towards Risk Based Supervision • Strengthening MIS

  25. Thank you!!!

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