Nepal’s banking sector undergoes comprehensive audit by KPMG India to ensure economic resilience

KATHMANDU: Major Commercial Banks in Nepal Set for Comprehensive Loan Portfolio Audit by KPMG India Amid Global Financial Stability Concerns

In a significant move to bolster financial stability in Nepal’s banking sector, KPMG India, an internationally recognized independent auditor, has been selected to conduct a detailed review of loan portfolios of ten leading commercial banks. The audit, set to commence from mid-September, is expected to provide critical insights into the financial health of these institutions, particularly in the context of the country’s economic resilience and compliance with international standards.

KPMG will audit the loans of these commercial banks that have disbursed the most loans. Global IME Bank has disbursed the highest amount of NPR 379.54 billion in loans as of the end of the current fiscal year.

Nabil Bank, with a loan disbursement of NPR 374 billion, ranks second among the banks with the highest loan disbursements. Nepal Investment Mega Bank, with a loan disbursement of NPR 307.05 billion, ranks third.

Similarly, Kumari Bank has disbursed NPR 273.20 billion, NIC Asia Bank NPR 272 billion, Laxmi Sunrise Bank NPR 250 billion, Rastriya Banijya Bank NPR 246.70 billion, Himalayan Bank NPR 232.72 billion, Prabhu Bank NPR 225 billion, and Agricultural Development Bank NPR 201 billion.

NMB Bank, which was among the top ten banks in terms of loan disbursements until the third quarter of the last fiscal year, has managed to escape KPMG’s audit. The bank’s loan disbursements declined in the fourth quarter of the last fiscal year, causing it to fall outside the audit scope. NMB Bank’s reduced loan disbursements placed it behind Nepal Bank Limited and Siddhartha Bank in terms of loan disbursements.

Nepal Bank Limited ranks 11th, and Siddhartha Bank ranks 12th among the banks with the highest loan disbursements. Standard Chartered Bank, with a loan disbursement of around NPR 81 billion, is the commercial bank with the lowest loan disbursement, followed by Nepal SBI Bank, Machhapuchhre Bank, and Citizens Bank.

KPMG will evaluate the credit risk in the loans of Nepali banks, monitor, control, and study their credit risk management systems.

Additionally, under the loan portfolio review, KPMG will conduct qualitative and quantitative assessments of commercial banks. The qualitative assessment will include studying the banks’ credit policies, guidelines, product papers, credit risk management roles, structures, risk management systems, implementation procedures, non-performing loans, asset valuations, and monitoring systems.

The review will also encompass the classification of loans, risk weighting, compliance with local regulations, and directives issued by Nepal Rastra Bank, as well as loan disbursement and non-performing loan management in commercial banks with high loan disbursements, according to NRB.

Background and Implications of the Audit

The initiative to audit the loan portfolios comes in response to the International Monetary Fund’s (IMF) stipulation under the Extended Credit Facility (ECF) arrangement with Nepal. The IMF has expressed concerns over the quality of loans disbursed by major banks, the potential risks associated with non-performing assets (NPAs), and the overall impact on the country’s financial stability. The IMF’s conditions require that the top ten commercial banks undergo an independent audit to ensure transparency and adherence to global best practices in loan disbursement and management.

Nepal Rastra Bank (NRB), the central bank of Nepal, has been proactive in addressing these concerns by initiating the process of selecting an independent auditor earlier this year. After a rigorous selection process involving five international auditing firms, KPMG India was chosen for its extensive experience and past involvement in Nepal’s financial sector reforms.

Impact on Financial Stability and the Banking Sector

The audit by KPMG India is expected to have far-reaching implications for the stability of Nepal’s banking sector. The findings will provide a clear picture of the quality of assets held by these banks, the effectiveness of their risk management practices, and their compliance with regulatory frameworks. This transparency is crucial not only for maintaining the confidence of depositors and investors but also for ensuring that the banking sector can withstand potential economic shocks.

The audit will cover several key areas, including the classification of loans, the assessment of credit risk, the effectiveness of loan monitoring systems, and the overall governance structures within these banks. The focus will be on identifying any discrepancies in the reporting of NPAs, assessing the adequacy of provisioning for bad loans, and evaluating the banks’ adherence to NRB’s directives on loan classification and risk management.

Implications for International Lenders and Climate Financing

The outcome of this audit will also be closely watched by international lenders such as the World Bank, the Asian Development Bank (ADB), and other global financial institutions involved in climate financing and economic development in Nepal. These organizations have a vested interest in ensuring that the funds they provide are managed effectively and that the financial institutions they partner with are stable and resilient.

In recent years, international lenders have emphasized the need for greater transparency and accountability in the use of funds, particularly in sectors like climate financing, where the impact of investments can have long-term implications for sustainable development. The audit will provide these institutions with the necessary assurance that Nepal’s banking sector is capable of managing the risks associated with large-scale lending, including those related to climate financing projects.

Challenges and Expectations from the Audit

One of the significant challenges of this audit will be the comprehensive assessment of the credit risk management practices within these banks. KPMG India will need to evaluate not only the quantitative aspects of loan portfolios, such as the volume of disbursements and the proportion of NPAs, but also the qualitative aspects, including the robustness of credit policies, the adequacy of internal controls, and the effectiveness of governance structures.

The findings of this audit are expected to provide valuable insights into the systemic risks within the banking sector and identify areas where improvements are needed. For the NRB, the audit will serve as a critical tool for enhancing its regulatory and supervisory frameworks, ensuring that the banking sector remains stable and resilient in the face of external shocks.

Potential Outcomes and Recommendations

Based on similar audits conducted in other countries, it is anticipated that KPMG India will make several recommendations aimed at strengthening the financial stability of Nepal’s banking sector. These may include:

Enhanced Risk Management Practices: Recommendations to improve the identification, assessment, and mitigation of credit risks, including the implementation of more stringent loan classification criteria and the establishment of more robust internal controls.

Strengthening Governance and Oversight: Suggestions to enhance the governance structures within banks, including the roles and responsibilities of boards of directors and senior management in overseeing loan portfolios and risk management practices.

Increased Transparency and Accountability: Proposals to improve the transparency of financial reporting, particularly in the disclosure of NPAs and the provisioning for bad loans. This could involve adopting more rigorous accounting standards and enhancing the role of external auditors in the financial reporting process.

Capacity Building and Training: Recommendations for capacity-building initiatives aimed at improving the skills and knowledge of bank staff in areas such as credit risk management, loan monitoring, and compliance with regulatory requirements.

Policy and Regulatory Reforms: Suggestions for the NRB to consider reforms to its regulatory and supervisory frameworks, including the introduction of more stringent guidelines on loan classification, provisioning, and risk management.

Wider Economic Implications

The implications of this audit extend beyond the banking sector and could have a significant impact on the broader economy. A stable and resilient banking sector is essential for supporting economic growth, particularly in a developing country like Nepal, where access to credit is a critical driver of business expansion and job creation.

The audit’s findings could influence the policies of international lenders such as the IMF, World Bank, and ADB regarding future lending and financial assistance to Nepal. Positive findings could enhance the country’s creditworthiness and increase its access to international financing, while any significant issues identified could lead to stricter conditions on future loans and financial support.

Moreover, the audit could have implications for climate financing in Nepal. As the country seeks to attract more investment in climate-resilient infrastructure and sustainable development projects, the stability and reliability of its banking sector will be crucial in securing the necessary funds from international sources.