The WB pledged its offer when its mission met with Finance Minister Bharat Mohan Adhikari on different days this week. The government readily welcomed the offer.[break]
“Going by the pledge, the WB is presently providing technical assistance to Nepal Rastra Bank (NRB) to carry out a scooping exercise to determine actions needed to forestall possible crisis,” said a source at the Ministry of Finance (MoF).
Over the last few days, the WB mission also interacted with senior government and NRB officials on areas in which authorities deemed its suggestions could be vital.
Based on the demand, the WB team is also charting out the probable causes and implications of the liquidity shortage, and assessing vulnerability and other weaknesses in the financial system.
The mission is also assessing the steps taken by the authorities so far. “Particularly it is assessing the effectiveness of these measures to mitigate the risks of existing vulnerabilities turning into a full blown financial crisis,” said the source.
The WB team is also expected to make suggestions on measures to bring the system back in order. “The mission will suggest immediate measures needed to stabilize the system and also recommend longer term measures to restore public confidence in the financial system,” the source told Republica.
Likewise, the WB has provided a consultant to NRB to help it formulate a contingency planning framework, which will lay down actions to be taken to deal with the problem in different scenarios.
An NRB taskforce with inputs from consultant Shamsuddin Ahmad is also working out choices of instrument for bank assistance and is also formulating a list of triggers for disbursement of funds under a possible crisis response operation.
The WB stepped in with its support after Nepali financial sector received the jolt last week due to sudden deepening of liquidity crisis. The crisis had deepened particularly after institutional depositors withdrew their large deposits from the development banks and finance companies, leaving them liquidity-strapped.
As a result, People´s Finance Limited on June 6 shut down its services and sought the central bank´s assistance to fulfill its regular financial obligations. Two days later (June 8), Vibor Bikas Bank too surrendered to NRB, requesting the NRB to either provide liquidity support or take over the management.
Such back-to-back crisis in People´s Finance and Vibor caused tremor in the market, making the depositors turn panic. The confidence had plummeted particularly as NRB has decided to liquidate Samjhana Finance, declared Gorkha and United Development Bank as troubled banks and taken action against promoters of Nepal Share Market Finance within the last three months.
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