The second financial sector development strategy has pointed out that the management of excess liquidity accumulated in banks and financial institutions over the last three years and the imbalance between credit and deposits has been challenging.

The Financial Sector Development Strategy (Fiscal Year 2082/83-2086/87), released by the Ministry of Finance on Wednesday, states that the appropriate management of liquidity created due to increasing competition in banks and financial institutions and structural changes in the economy is becoming challenging.

‘The situation of imbalance between deposit mobilization and credit flow has been repeated time and again. Credit in the banking sector is centralized in terms of sectors and groups,’ the strategy states, ‘Access to credit has not been expanded sufficiently. After the global pandemic of Covid, the non-performing loan ratio has increased due to the failure to recover loans as expected, and non-banking assets have also increased.’

Despite the expansion of commercial bank branches in all 753 municipalities, the strategy states that financial institutions have not had a sufficient physical presence in all rural areas due to the lack of adequate infrastructure, difficult geographical conditions, and scattered settlements.

It is also a challenge to promote investment by creating a competitive environment by eliminating existing structural problems in the economy, creating domestic employment in line with the national environment, developing entrepreneurship, and substituting imports. However, it is stated that the task of flowing credit to the productive sector and ensuring credit utilization is challenging.

With the increasing use of technology, cybersecurity risk management is seen as another major challenge. The strategy states that the task of providing accessible financial services is not easy when the informal economy has not been adequately displaced.

‘Risk-based regulation and supervision of systemically important banks (SIPs) that have merged with the banking sector and have large capital structures through acquisitions has not been increased,’ the strategy states, ‘The task of accurately identifying asset quality and accurately analyzing the trend of interconnected credit transactions is challenging.’ The strategy also states that the task of implementing an integrated supervision system in interconnected institutions is challenging as problems arising in one sector of the financial sector can spread to other sectors.

The strategy has set a strategy to prepare clear criteria for strengthening and stability of the financial sector, enhance regulatory capacity and institutional strengthening, and review the structural condition (classification, regulatory management, and scope) of banks and financial institutions. The strategy also includes a strategy to develop a system for exchanging information/data among financial sector regulators, and to bring the comprehensive supervision of subsidiaries of banks and financial institutions within the legal framework. 

It is stated that laws will be formulated for the establishment of asset management companies, issuance of regulations to identify systemically important banks, and control criminal activities targeting the banking sector by minimizing cyber risks. The strategy also includes a strategy to prepare a financial stability index to measure financial stability and develop a resilient financial sector.

The institutional banking system in Nepal began in 1994. Until 2040, only four government-promoted banks and financial institutions existed. The private sector entered this sector from 2041. In line with the liberalization policy adopted after the change in 2047, Nepal Rastra Bank also became very flexible in establishing financial institutions in order to increase financial access and raise resources for development.