Strengthening Banking Supervision in Nepal (IMF)

Program Development Objective (PDO)

The objective of the technical assistance (TA) program is to foster financial stability in Nepal through strengthened banking and financial institution (BFI) supervision and solidly establish effective on-site supervision and modernize off-site supervision such that it is brought to a level that would support and complement the on-site processes. 


Nepal’s existing legal framework and a crowded banking sector that outstrips supervisory capacity has stymied the modernization of the supervisory function. Supervision is conducted on the compliance-based approach and the existing resolution process is complex and generally not used due to its unpredictable and time-consuming nature.  Implementation of TA has been hampered by the major earthquakes in April and May 2015; civil unrest; an embargo with a major trade partner and the consequent economic slowdown.

Building institutional capacity and instilling risk-based supervision require sustained longer-term efforts, particularly in those jurisdictions that are starting from weak foundations. The Nepal Rastra Bank (NRB) is at a critical juncture where TA is vital to solidify the gains made thus far and continue to address gaps. The FIRST program builds on previous TA provided and supplements the long-term expert missions with short-term expert missions. In part, the TA program focuses on ensuring robust on and off-site risk-based supervisory (RBS) regime that confirms banks are exercising risk management; and the early identification of trends and issues in banks and result in the correction of identified problems.

An FSAP conducted in February 2014 concluded that the NRB’s supervisory regime was inadequate. A Basel Core Principle assessment as of February 2014 assessed 23 principles as materially non-compliant; five as non-compliant and one largely compliant. 

Activities / Output

This TA program focuses on the following results to address the gaps identified in the FSAP:

1.  Robust regulatory framework;
2.  Robust on and off-site RBS regime that confirms banks are exercising risk management;
3.  Resilient banks with stronger management; and 
4.  Early identification of trends and issues in banks and result in the correction of identified

The Basel Core Principles for Effective Banking Supervision (BCPs) are de facto minimum standards for the sound prudential regulation and supervision of the banking sector. To ensure TA provided is meaningful and durable, the core principles must be considered in the TA’s design and delivery. The principles selected are essential to providing a sound foundation on which the authorities can build a robust supervisory regime; and focus on clarifying the legal framework; strengthening the licensing process; upgrading the supervisory tools and enhancing the accounting, reporting and audit standards. Achievement of the results will be benchmarked against the select principles. 

The program’s outputs include: 

    •  Reviewing and drafting advice on regulations
    •  Risk management and supervision guidelines
    •  Off-site supervision manual
    •  Updated licensing criteria provided
    •  Guidance on ladder of enforcement
    •  Support to roll-out of on-site RBS supervision

Expected Outcomes

The long-term expected outcomes of this project include:

1.  Robust regulatory framework that complements the revised NRB Act and BAFIA 
2.  Robust risk management is practiced at Nepal banks and financial institutions
3.  NRB conducts risk-based supervision
4.  More resilient banks and stronger management in banks
5.  Problem banks are identified sufficiently early to allow corrective action