In a bid to improve Nepal’s alarming credit scenario, the International Monetary Fund (IMF) directed the country to fast-track its banking sector reforms.
The international body stated this in view of the rising credit in Nepal banking sector provisions pertaining to loan classification, loan-loss provisioning and risk management.
“Rapid credit growth underscores the need to accelerate banking sector reforms. Loan classification, provisioning, and banks’ risk management practices should be upgraded,” says IMF’s latest South Asia Regional Update.
Nepal’s Deteriorating Credit Scenario
Nepal’s loose monetary policy and mandatory central bank requirement of four-fold rise in paid-up capital of commercial banks has triggered rapid credit expansion. Besides this, the private sector’s low lending growth at an average 22 percent in the last two years has resulted in this scenario.
A big chunk of credit continues to enter these sectors despite the central bank’s attempts to curb the flow of credit to unproductive sectors through revision of loan-to-value ratio on car and real estate loans.
IMF suggested that credit expansion take place in a sustainable manner. However, this could hit the country’s economic growth.
Nepal’s Economic Performance
In the last two years, Nepali economy has made rapid progress with the growth rate standing at eight percent in FY 2016-17 and 6.3 percent in FY 2017-18.