The world economy grew at 3.7 percent in 2017 and is expected to expand at the same rate for both 2018 and 2019 according to World Economic Outlook (WEO) October 2018. The advanced economy grew 2.3 percent in 2017 and is expected to grow at 2.4 percent in 2018 and 2.1 percent in 2019. Emerging market and developing economies grew 4.7 percent in 2017 and is projected to expand at the same rate in both 2018 and 2019. For 2018-19, the growth rates are expected to scale up in Commonwealth of Independent States, Latin America, and the Caribbean and Sub-Saharan Africa, and expected to slowdown in Emerging and Developing Europe, European Union, and Emerging and Developing Asia.
According to WEO October 2018, inflation remained at 1.7 percent for Advanced Economies and 4.3 percent for Emerging and Developing Economies in 2017. The inflation forecast for Advanced Economies is 2 percent for 2018 and 1.9 percent for 2019 whereas such forecast for Emerging and Developing Economies is 5.0 percent for 2018 and 5.2 percent for 2019 on account of expected higher energy prices in these years. However, core inflation remained very different across advanced countries. In Nepal, annual average consumer price inflation decreased to 4.2 percent in 2017/18 from 4.5 percent in the previous year. The normal supply situation and lower global prices including that of India contributed to inflation easing in the review year. While the average food inflation increased to 2.7 percent in 2017/18 from 1.9 percent in the preceding year, nonfood inflation decreased to 5.3 percent in the review year from 6.5 percent a year ago.
Central Bureau of Statistics (CBS) estimated the growth of real GDP (at producers' price) at 6.3 percent in 2017/18 compared to 7.9 percent in 2016/17. Similarly, the real GDP at basic price is estimated to grow 5.9 percent compared to a growth of 7.4 percent in the previous year. GDP grew at a healthy rate despite unfavorable weather conditions due to the expansion of electricity, power and gas sector, pick up in construction activities, the improved output of the industrial sector and increased tourist arrivals among others.
Merchandise exports grew 11.1 percent in 2017/18 to Rs. 81.19 billion compared to a growth of 4.2 percent in 2016/17. Total merchandise exports as a percentage of GDP shrank to 2.7 percent in the review year from 2.8 percent in the previous year. Merchandise imports increased by 25.5 percent to Rs. 1242.83 billion in the review year as against a growth of 28.0 percent in the previous year. The total import to-GDP ratio increased to 41.3 percent in the review year from 37.5 percent of the previous year. The merchandise trade deficit widened 26.7 percent to Rs. 1161.64 billion in 2017/18. The export-import ratio declined to 6.5 percent in the review year from 7.4 percent in the previous year. Total merchandise trade deficit as a percentage of GDP jumped to 38.6 percent in the review year from 34.7 percent of the previous year
The total services receipts increased to 12.1 percent and expenses rose to 12.9 percent in the review period. As a result, net services surplus stood at Rs. 2.07 billion in the review year compared to Rs. 2.89 billion in the previous year.
The workers' remittances increased by 8.6 percent to Rs. 755.06 billion in the review year compared to a growth of 4.6 percent in the previous year. The ratio of workers' remittances to-GDP declined to 25.1 percent in 2017/18 from 26.3 percent in 2016/17. The net transfer receipts increased by 1.5 percent to Rs. 864.67 billion in the review year. Such receipts had increased by 9.5 percent in the previous year.
Global Financial Stability Report October 2018 finds that the regulatory frameworks have been enhanced and the banking system has become stronger but the resilience of a global financial system is yet to be tested with the emergence of new vulnerabilities that have arisen after the global financial crisis. It further asserts that the short term and medium-term risks to global financial stability have increased due to easy financial conditions contributing to the buildup of financial vulnerabilities. It further asserts that global financial conditions have marginally tightened and the divergence between the advanced and emerging economies has grown. Continuation of global economic expansion in advanced economies has been accommodative to date. Financial conditions of emerging economies have tightened due to higher external financing costs, rising idiosyncratic risks and escalating trade tensions. All these upswings and downswings in advanced and emerging market economies have jointly created a threat to the world economic stability.
The Nepalese banking system is undergoing restructuring and consolidation, particularly through the merger/acquisition and paid-up capital increment. As of mid-July 2018, the total number of banks and financial institutions stood at 151 comprising commercial banks 28, development banks 33, finance companies 25, and microfinance development banks 65. Besides, 40 other financial intermediaries licensed by NRB, 39 insurance companies (including 20 life, 18 non-life, and 1 reinsurance company) and several non-bank financial institutions such as EPF, CIT, and Postal Saving Bank are also in operation.
The share of banks and financial institutions in total assets and liabilities of the financial system stood at 77.68 percent in mid-July 2018. The commercial banks remained the key player in the financial system occupying 64.29 percent of the system's total assets followed by development banks (7.76 percent), finance companies (1.99 percent) and microfinance financial institutions (3.64 percent). In case of contractual saving institutions, EPF is a dominant institution having
6.05 percent share, followed by insurance companies (5.39 percent), CIT (2.36 percent), and Reinsurance Company (0.21 percent) as of mid-July 2018. The share of cooperatives in the total financial system stood at 8.04 percent in mid-July 2018 compared to 9.68 in mid-July 2017.
Total assets of BFIs increased by 18.81 percent and reached to Rs. 3575 billion. Commercial banks had provided 16.25 percent of their total loan to the priority sector which includes 8.16 percent in agriculture, 3.94 percent in hydropower and energy sector and 4.15 percent in the tourism sector. Commercial banks have lent 8.16 percent in agriculture which is less than the regulatory limit of 10 percent. Similarly, commercial banks have lent 8.09 percent in energy and tourism sector, which is less than the regulatory limit of 15 percent.
The overall deprived sector lending by BFIs as of mid-July 2018 remained 6.28 percent where commercial banks, development banks, and finance companies have lent 5.94 percent, 9.47 percent, and 5.46 percent respectively. In mid–July 2018, the capital fund of BFIs increased by 19.88 percent to Rs. 370.01 billion from Rs. 308.65 billion in mid–July 2017. The overall CAR of BFIs in mid-July 2018 stood at 15.15 percent which was 15.40 percent in the previous year.
NPL of BFIs stood at Rs. 38.51 billion in mid-July, 2018 compared to Rs. 36.10 billion in mid-July 2017. In terms of a ratio of NPL to total loans, the banking sector showed improvement in assets quality and sufficient provisions during the period of 2012-2018 indicating the banking sector's resilience in large. NPL to total loans of the banking industry stood at 1.60 percent of total loan comprising 1.39 percent of commercial banks, 1.09 percent of development banks and 10.83 percent of finance companies.
Credit flows from BFIs increased by 21.47 percent in mid-July, 2018 compared to a year ago. Such increment was 18.60 percent in mid-July, 2017. The credit of commercial banks, development banks, and finance companies grew by 21.69 percent, 17.93 percent, and 16.68 percent respectively in mid- July 2018.
Deposits of BFIs increased by 18.96 percent in mid-July 2018. The deposit growth of commercial banks, development banks, and finance companies registered 18.07 percent, 26.08 percent, 21.92 percent respectively in mid-July 2018.
The overall profitability of the banking sector has increased by 12.20 percent in mid– July 2018 and reached Rs. 61.34 billion. The growth rate of the profitability of the banking sector in the last year was 11.57 percent. The commercial banks posted the highest share of the profitability of the banking sector accounting for 87.44 percent of the total in mid-July 2018.
After the issuance of the "Bank and Financial Institutions Merger By-laws, 2011", 162 BFIs have merged with each other forming 41 BFIs as of mid-July 2018. In the review period, 19 BFIs have merged and acquired to form 9 BFIs. As of Mid July 2018, the branch network of commercial banks reached 3023 followed by development banks (993), Finance companies (186) and Micro Finance Financial Institutions (2450). On average, a BFI branch, excluding the branches of “D” class financial institutions, has been serving to approximately 6858 people. The banking service served population comes down to 5227 people per branch when branches of "D" class are also included.
The state-owned commercial banks comprise a 15.14 percent share in the total deposits of commercial banks. Their market share in terms of total assets, total deposit and loan & advances of all BFIs stood at 13 percent, 15.14 percent, and 12.42 percent respectively in mid-July 2018. As of mid-July 2018, capital fund of three state-owned banks, namely, NBL, RBB, and ADBL stood at Rs. 11.45 billion, Rs. 14.30 billion and Rs. 21.78 billion respectively.
In mid-July 2018, the share of commercial banks in total assets and liabilities of NRB regulated BFIs increased to 83.42 percent from 82.75 percent in mid-July 2017. Similarly, the ratio of total assets and liabilities of commercial banks to GDP increased to 103.23 percent in mid-July 2018 from 100.8 percent a year ago. The dominance of commercial banks in the total banking sector in terms of assets and liabilities as well as in terms of balance sheet component has broadly remained stable. The total assets and liabilities of commercial banks increased by 18.43 percent to Rs. 3068.6 billion in mid-July 2018 from Rs. 2584.6 billion in mid-July 2017. Total deposit and credit of commercial banks stood at 82.20 percent and 70.24 percent of GDP respectively in mid-July 2018 compared to 80.53 percent and 66.10 percent of GDP respectively in mid-July 2017. Total deposits grew by 18.07 percent to Rs. 2471.51 billion in 2017/18 compared to the growth of 18.63 percent in the previous year. Total credit flow grew by 21.68 percent and reached to Rs. 2112.33 in mid-July 2018.
Development bank's total deposits have increased by 23.33 percent to NPR 301.97 billion in 2017/18 while gross loans have increased by 19.06 percent to NPR 253.24 billion. Development banks seem to have performed quite well in 2017/18. They have grown at a brisk pace such that the growth rate in their deposits has been greater than that in their lending, they have put in more capital and have further improved the already good quality of their loan portfolio. Total assets of development banks have increased by 21.01 percent to NPR 374.81 billion during this period.
Share of finance companies in the overall economic activity is smaller in comparison to A and B class FIs, as shown by their low deposit to GDP ratio which stood at 2.11 percent in mid-July 2018. Such a ratio was 2.01 percent in mid-July 2017. The total assets and liabilities of finance companies increased by 22.83 percent to Rs. 83 billion in mid-July 2018 compared to mid-July 2017. Finance companies mobilized aggregate deposits of Rs. 62 billion in mid-July 2018, an increment of 23.79 percent compared to mid-July 2017.
As of mid-March 2018, deposits of cooperatives totaled Rs. 311.23 billion while their total credit stood at Rs. 276.45 billion. There are altogether 38 (20 non-life and 18 life) insurance companies as of mid-July 2018. The data received from the Insurance Board of Nepal, reveals that the total assets/liabilities of insurance companies rose by 40.03 percent to Rs.260.30 billion in 2017/18. According to unaudited figures of mid-July 2018, The total assets/liabilities of Employees Provident Fund (EPF) increased by 16.27 percent to Rs. 292.16 billion in 2017/18. Likewise, the funds collected by the EPF grew by 14.17 percent to Rs. 278.75 billion in the review period.
Short term and long term interest rates in the financial market remained relatively high in 2017/18 in comparison to 2016/17. Nepalese currency depreciated by 6.30 percent against the US dollar during the end of 2017/18 compared to an appreciation by 3.63 percent in the same period of the previous year. The exchange rate of one US dollar stood at Rs. 109.34 in mid-July 2018 compared to Rs. 102.86 in mid-July 2017. The NEPSE index plunged by 23.4 percent to 1,212.36 points in mid-July 2018compared to mid-July 2017. The Float index which was 116.14 points in mid-July 2017 decreased by 25 percent to 87.15 points in mid-July 2018.
Financial Stability Report:
