Kathmandu: A recent investigation by Nepal Rastra Bank (NRB) has uncovered that several commercial banks in the country are manipulating their financial data to project a healthier image than reality.
According to the central bank’s annual supervision report, these institutions have been artificially inflating their capital adequacy ratios by miscalculating risk-weighted exposures and failing to allocate sufficient funds for loan loss provisioning. This deceptive practice effectively hides the true extent of the financial risks these banks carry on their balance sheets.
The supervision report highlights a significant discrepancy between the internal risk assessments conducted by the banks and the official data they submit to the regulator through the Supervisory Information System. To maintain the appearance of a robust capital structure, banks have been found reclassifying distressed loans, which should be categorized as substandard, doubtful, or loss, into lower-risk brackets. By assigning these troubled assets a lower risk weight, banks are able to show a stronger capital position than they actually possess.
The audit further revealed that some banks have gone as far as removing outstanding bank guarantee claims from their risk-weighted exposure calculations entirely. Additionally, within their “Regulatory Retail Portfolios,” these institutions are reportedly using only single-threshold criteria to maintain lower risk weights, a tactic that obscures the true vulnerability of their credit portfolios. Such manoeuvres allow banks to window-dress their asset quality and avoid the necessary capital buffers required by law.
Beyond the manipulation of numbers, the central bank pointed out systemic weaknesses in the Internal Capital Adequacy Assessment Process (ICAAP). Many banks have failed to conduct mandated annual reviews of their capital adequacy and have ignored deadlines for submitting these reports to the regulator. Instead of setting capital targets based on their specific risk profiles, these institutions are treating the regulator’s minimum requirements as their maximum targets, failing to account for additional capital buffers or clarify thresholds for Common Equity Tier-1 capital.
The central bank expressed serious concern over the lack of structural policies for capital management within several institutions. The absence of both short-term capital strategies and long-term capital planning leaves these banks ill-prepared to manage potential future financial crises. Warning that such tendencies pose a significant threat to the overall stability of the nation’s financial system, Nepal Rastra Bank has issued stern directives to the offending banks to rectify these reporting and structural deficiencies immediately.
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