The central bank has claimed that banks have sound financial health.
"The stress test results of commercial banks as of mid-July 2012 on credit, liquidity and market shocks revealed their ability to withstand high shocks," according to Nepal Rastra Bank's (NRB) Financial Stability Report.
Among the 32 existing commercial banks, a standard credit shock would push capital below the regulatory minimum in 22 banks, and two commercial banks would be under-capitalised, it said, adding that sustained deposit withdrawals over five consecutive days would render five banks illiquid, and liquidity ratios of 17 banks would fall below 20 per cent in the event of sudden large withdrawals by institutional depositors. "Given the amount and nature of exposure, commercial banks are relatively less vulnerable to market shock."
While the resilience of the commercial banks to credit and market shocks have improved over time, the liquidity scenario analysis shows some potential risk, it added, though the soundness of financial institutions was maintained with adequate capital, liquidity and profitability buffers and improvement in asset quality.
The banking sector is adequately capitalised with the overall industry average capital ratio of 18.2 per cent. The Capital Adequacy Ratio (CAR) of class 'A', 'B' and 'C' institutions stood at 11.5 per cent, 20.5 per cent and 23.1 per cent, respectively, in mid-July 2012, which is well above the minimum regulatory requirement.
Likewise, the asset quality of commercial banks has shown some signs of improvement with the reduction of non-performing loan (NPL) ratio from 3.2 per cent in mid-July 2011 to 2.6 per cent in mid-July 2012. The average NPL ratio of banks and financial institutions stood at 6.1 per cent with finance companies having the highest ratio of 10.7 per cent followed by development banks with 4.9 per cent, according to the report.