The stress tests of commercial banks indicate that Nepali financial sector is facing higher credit risk and liquidity risk, according to the International Monetary Fund (IMF) report.
"Stress tests undertaken on the Class A banks by Nepal Rastra Bank (NRB) indicate credit and liquidity risks, though because of the unreliable data issues, the results may be overly optimistic," the report on Financial Stability of Nepal prepared by IMF stated.
The subsequent downgrading of loans from performing to substandard and finally to loss indicates the credit related risk being faced by the banks, it said, adding that the numbers of loans being downgraded is increasing as 15 per cent of performing loans were downgraded to substandard, 15 per cent of substandard loans were downgraded to doubtful, and 25 per cent of doubtful loans were downgraded to loss loans and five per cent of performing loans have been downgraded to loss.
"Financial sector poses higher credit risk due to the over-exposure to real estate which is not in good shape right now," pointed out spokesperson for Nepal Rastra Bank (NRB) Bhaskar Mani Gyanwali.
The indicators suggested deterioration in asset quality because of real estate collaterals that have seen downward revision in prices. Since the real estate market has cooled down so that 25 per cent of performing real estate and home loans has possibility of becoming bad loans, it suspected.
Currently, the sector has borrowed over Rs 120 billion from the financial institutions.
Though the financial institutions are comfortable liquidity currently. The IMF has, however, pointed out severe liquidity risks. "The situation has improved in last few months as deposits have grown since the beginning of current fiscal year," informed Gyanwali.
"Though both kinds of risks have moderated in recent times there is still need to keep an eye on few financial institutions for being relatively more vulnerable," he added.
The report has also attributed under-reporting of Non Performing Loans (NPL) by a large number of banks as a serious concern that prevents detection of problems in early stage.
The Fund has suggested stronger regulation and enforcements to keep the financial institutions under check to avoid financial institutions going bad. "The central bank is more vigilant in detecting any misrepresentation in financial data reporting but unfortunately there are numbers of financial institutions that manipulate balance sheet to show better health," the central bank spokesperson added.