In the last fiscal year, the financial sector contributed about 6.3 percent to Nepal’s gross domestic product (GDP). This contribution had more than doubled over a period of a decade. But with the onset of the global pandemic, the prospect of Nepal's financial sector looks fairly bleak as it is one of the most severely hit. The severity of the impact of the pandemic, however, will mostly depend on its duration, the government’s preparedness, and the efficacy of the health care system. Also, given the pervasiveness of spread of the virus across the globe, Nepal will not remain untouched by sharply reduced international flow of finances, along with other interactions, across economies.

The overarching uncertainty in every walk of national life as the world is completely gripped by the clutches of the pandemic, followed by a long lockdown announced by the government, has virtually halted all economic activities—in production, distribution and, to a great extent, consumption, too. During the last two weeks, cash withdrawal of about Rs5 billion from the banks and financial institutions (BFIs) signals diminished consumer confidence. At the same time, the emerging scenario of drastically reduced investment opportunities may soon result in excessive liquidity in the system. The potential extensive default on the repayment of loan and mortgage instalments pose the real risk of systemic failure. The government’s response to the crisis seems to have been announced without much homework done, and it has put the entire banking industry under additional duress.

At this critical juncture of existential crisis, the Nepali banking sector seriously needs to work on risk evaluation. Some risks are inevitable and require equally meticulous plans to take them head-on.

Operational risk

The disruption to normal life will continue for a long while. This will put some added pressure on BFIs; the logistics management in a new normal will be challenging enough, but there are also added costs to consider, such as for the procurement of protective and sanitising equipment. Further, staff absenteeism may increase—due to both psychological resistance and added family obligations. All of this will bring about additional challenges in human resources management as well.

Further, the cost for deposit mobilisation could increase substantially, since the government's development budget is unlikely to be spent as per guidance. Customers are likely to hold a more-than-normal amount of cash with them due to the uncertainty surrounding the future. On the other hand, due to reduced production and other economic activities, the demand for credit in lucrative investable projects could also plummet. All this will have obvious adverse effects on the financial health of the BFIs.

The Covid-19 pandemic may force the asset prices to decline, and it may place the balance sheet of many financial institutions under pressure for several fiscal years. Banks will operate at a higher degree of competition—to attract deposits as well as to find investable projects. This, in turn, will lead some financially vulnerable BFIs towards bankruptcy. The role of the regulator and the government policies in the days to come will be critical in saving the entire financial system from such predicament.

Currency risk

Nepal's currency risk is largely associated with the health of the Indian economy because the Nepali rupee is strictly pegged to the Indian currency. As the Indian rupee faces an almost 5 percent depreciation against the US dollar, and as India’s economy has been on a downturn, Nepal will feel the shock, too. Remittance inflow has been Nepal's main source of foreign currency earning for years now. But this is also in a declining trend, seeing a 0.5 percent reduction during the first seven months of the current fiscal year. Another key source of foreign currency earnings, the tourism sector, may take a very long time to resurrect. All this will reduce Nepal's reserves of foreign currencies, making it difficult for her to pay the ballooning import bills.

Financial institutions with hedge investments will experience swinging stresses as per the extent of the disruption by the impact of the novel coronavirus on the global economy. There are numerous big projects in which the bank and financial institutions have been invested. These will be infected by the high fluctuations on the exchange rate which will further hamper the profitability and repayment amount of loans in the banking sector.

Nepal's own management of the money market should be another key area of risk management. As both inflation or stagflation are unwanted ailments to the economy, policy measures alone, without actual injection of cash by the government, may have very little desired impact.

Cushions and measures

To mitigate these unwanted risks, at least some measures are inevitable—hopefully implemented sooner rather than later.

A major one will be effective communication. Senior executives with communication skill can mitigate market fears, minimise staff absenteeism and maintain a market presence, adding more value to customers. The banking industry now needs to coordinate across business functions, employee health, lending portfolio and recovery. It should focus on how to revive all services with strong internal and external communication strategies, along with a recovery plan. It should also focus on maintaining the reserves at healthy levels, enhancing the quality of service and modifying deposit and loan products as per the need of the times.

The client support system is the most pivotal aspect of addressing the present situation, where the business confidence of most entrepreneurs and borrowers has hit rock bottom. Borrowers need technical and cash-flow management support to sustain their business. Thus, banks should first establish the mechanism to interact with its loan customers to address their problems. Then, in consultation with their customers, they can reschedule the payment also in line with the relief packages announced by the government and Nepal Rastra Bank.

Finally, the government must come up with a workable stimulus and support package in consultation with the representative industry organisations, one being the Nepal Bankers’ Association. Many of the blanket policies announced by the government, like deferral on payments for all and sundry, including those who are capable and willing to pay, has put the BFIs in a very awkward situation. Any deferral in payment for banks is a cost augmentation. Therefore, the government can instead ascertain the relief needs of the pandemic-affected borrowers on an individual basis and provide support accordingly, instead of making generic policy statements which are eventually impossible to implement.

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