Introduction

The International Monetary Fund (IMF) has announced plans for a comprehensive financial audit of Nepal's 10 largest banks, with the aim of reviewing their loan portfolios. This move is part of Nepal's agreement with the IMF to receive funding under its Extended Credit Facility (ECF). The audit will focus on assessing loan and collateral valuation, evergreening, group borrowing, and concentration risks. 

Reasons behind the initiative

This move is a response to the financial difficulties that banks and other financial institutions have recently encountered. In mid-January, the average non-performing loan (NPL) in Nepal's banking sector was 4.29 percent, according to the central bank. However, the IMF questions if the banks and other financial organizations accurately recorded the amount of non-performing loans.

The central bank has emphasized the need to expedite the audit process in order to support its assertions. The IMF designated foreign independent auditors will be leading the audit of ten major commercial banks, which the central bank has actively prepared for. However, the recruitment procedure for the auditors has been beset by delays.

A request for foreign bids to choose independent auditors has been made by the NRB. The ten largest banks in Nepal will have their audits carried out by the chosen auditors in accordance with the central bank's Terms of Reference (ToR). Preparations for the next audit of these large commercial banks are already under way, according to central bank insider sources. 

In line with the IMF's fears about the condition of loans and bad debts in Nepal's financial institutions, the central bank's official statement expresses concerns about the liquidity, debt flow, and profitability of banks.There has been an increase in bad loans in banks and other financial organizations recently. The banking industry has maintained that bad loans in South Asia were negligible until the previous year, but the IMF is not convinced. It has expressed worries recently regarding the susceptibility of banks in their risk assessment and classification. Even while some banks have controlled credit risks within the guidelines established by the central bank, new issues brought forward by the IMF have emerged.

On-going process and the efforts made

Delays in finalizing terms of reference (ToR) for the audit have pushed back the start date, but preparations are ongoing. The IMF and NRB emphasize the importance of the audit in uncovering the true extent of non-performing loans (NPLs) in the banking system, especially in light of increased NPLs due to the COVID-19 pandemic. Concerns have been raised about the deteriorating asset quality of banks, prompting the need for increased vigilance and supervisory efforts. While admitting that there have been some delays in the audit process, the central bank maintains that, in line with the banks' mature financial information, preparations are in place for the independent auditors' worldwide examination. 

Conclusion

The audit, to be conducted by international auditors, aims to address these concerns and ensure financial stability in Nepal's banking sector. Working with foreign auditors will enable a comprehensive examination and audit of the loan portfolios of the top 10 banks in compliance with the new regulatory framework, with oversight from the foreign Audit Inspector. The impending audits would likely result in a thorough assessment and possible reorganization of Nepal's financial system.