No Proper System to Monitor Loan Utilization in Commercial Banks

Banking News – Nepal Rastra Bank (NRB) has pointed out that many banks have failed to properly evaluate the performance of their Chief Executive Officers (CEOs). In its annual Bank Supervision Report 2023/24, the Bank and Financial Institution Supervision Department of NRB states that some banks are not adhering to the performance appraisal agreements made with their CEOs.

“The implementation status of board decisions was not reviewed, and unimplemented decisions were not reconsidered,” the report mentions. NRB has also called for improvements in inventory and record management, stating that banks are lagging behind in cheque and card record maintenance.

Though banks are generally required to maintain 90-day backups of their CCTV footage, NRB found that some institutions failed to meet even this minimum standard. Additionally, payment advice slips printed by branch systems were missing in certain locations.

Lack of Monitoring on Loan Utilization

NRB’s report highlights the absence of proper systems in commercial banks to ensure whether loans are being utilized for their intended purpose. “Some banks lack effective mechanisms to monitor whether loans are being used according to the stated objectives,” the report says.

Audit Manipulation and Human Resource Gaps

The central bank has also raised concerns over audit practices, noting that some banks lack sufficient personnel to conduct effective internal audits. While banks are supposed to recommend three external auditors for reviewing their proposed annual budgets, many are found recommending only one, in violation of legal provisions under the Bank and Financial Institutions Act, 2073 and the Company Act.

Furthermore, banks have not been complying with NRB’s instructions regarding audit committees, sometimes including five members against the prescribed norm. The report also points out that internal audits are not being conducted independently and that recommendations from audit departments are being ignored.

Loans Over Rs. 5 Million Given Without Clear Purpose

The report criticizes banks for providing personal loans exceeding Rs. 5 million without any specified purpose—against NRB’s clear directives. Similarly, many banks are issuing loans without preparing proper product papers, and some product papers are not updated regularly.

In some cases, loans intended for specific purposes were diverted to unrelated areas but were still classified as “good loans.” NRB also found that after disbursing loans, banks often fail to monitor their usage. In certain instances, no provisions were set aside for auction-bound loans. Some banks were found disbursing loans without collateral and without utilizing internal credit rating systems. Furthermore, banks have failed to submit audited financial statements, tax certificates, and conduct site visits.

Rising Resignations and Management Stress

Employee turnover in the banking sector is on the rise, fueled by overseas opportunities and negative campaigns against the banking industry. NRB acknowledges that threats, smear campaigns, and even physical assaults on employees are affecting both public trust and bank performance.

This trend has led to serious staffing issues. The report also notes a rise in fraudulent activities involving fake collateral, deposit misuse, and loan misappropriation, emphasizing the urgent need for greater transparency, better governance, and enhanced employee training.

Insufficient Investment in Digital Banking

Despite progress in digital banking, NRB found that some banks still maintain investment and sales records manually. Several banks have not developed proper policies to manage interest rate or foreign exchange risks, nor have they analyzed the impacts of interest rate volatility.

Emergency financial plans often fail to incorporate external risks like pandemics and natural disasters. As cyber threats and data privacy concerns grow, NRB stresses the importance of financial literacy and staff training to minimize risks in digital banking operations.