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Financial Sector Development Strategy being finalised
The government has been putting the finishing touches to the Financial Sector Development Strategy (FSDS) which was announced during the budget presentation in the last fiscal year.
The FSDS will have a collective strategy for banking, insurance, cooperative, capital market and non-banking financial institutions such as the Employees Provident Fund and the Citizen Investment Trust.
According to officials engaged in formulating the strategy, the proposed draft has envisaged forming a Crisis Coordination Committee among regulators to quickly act against possible catastrophes in the financial sector.
Likewise, the proposed strategy has talked about converting supervision of financial institutions from compliance-based to risk-based.
Even though a few measures have been taken to make supervision risk-based such as introduction of stress tests in banks and financial institutions (BFIs), Nepal Rastra Bank (NRB) is still heavily dependent on the compliance-based approach under which it checks whether BFIs have been adhering to its directives or not.
With massive deposits in loosely regulated cooperatives emerging as a big threat to financial stability in the country, the proposed strategy has mentioned introducing a new Cooperative Act giving the regulator greater powers allowing it to issue directives and penalize wrongdoers, said officials.
The formation of such a body has been proposed to maintain financial stability based on the knowledge gained from the global financial crisis in 2008, said an official. As far as development of the financial sector is concerned, measures have been proposed to spur growth of the real sector (productive sector).
“Based on the realization that economic growth has remained sluggish despite a massive growth in the financial sector such as banking and insurance and even the capital market, measures have been inserted to enhance the contribution of the financial sector to the growth of the real sector,” said the official.
“Discussions are continuing whether the current categorization of BFIs has been helpful in increasing the financial sector’s contribution to economic growth.”
Under financial access and inclusion, the draft has proposed promoting micro-finance, mobile banking and micro-insurance.
Although the central bank has been making efforts to increase financial access and inclusion by introducing a number of targeted measures such as deprived sector lending and targeted programmes for poor women, inclusion is still at a low level.
According to World Bank data related to financial inclusion in 2011, only 11 percent of the population take loans from financial institutions while the percentage of those borrowing money from families and friends is 33 percent. Only 25 percent of Nepalis have accounts in formal financial institutions.
According to NRB data, there were a total of 12.5 million accounts including duplicated accounts in A, B and C class banks and financial institutions as of mid-May.
In order to improve governance in the financial sector, the draft has incorporated measures like giving more autonomy to regulators and enhancing the current auditing and accounting standards.
“The issue of increasing financial literacy has also been included,” said a source. As far as infrastructure is concerned, the FSDS has talked about strengthening information technology related infrastructure. For capacity building, it has provisioned that focus should be given to enhancing capacity from the entry level.