The Nepal Rastra Bank (NRB) recently canceled the bid process for appointing an international auditor to audit the country’s largest commercial banks. But wait, why is Nepal Rastra Bank appointing auditors for the audit of the banks? Isn’t it the shareholders who appoint the auditors? Yes, that’s true. The shareholders of the banks in the annual general meeting appoint the external auditors for the statutory audit. But the audit we are talking about here is a special audit. More on that in the later part of this article. 

But first, let’s discuss the cancellation. This cancellation comes after only one out of five Firms selected submitted their proposal. That one firm is KPMG Assurance and Consulting Services from India. Other firms that were shortlisted are: 

 

1. Deloitte Financial Advisory – Netherlands
2. KPMG Taseer Hadi & Company – Pakistan
3. Joint Venture between PricewaterhouseCoopers (India) and CSC & Company (Nepal) – Chartered Accountants
4. Joint Venture between SR Batliboi & Associate LLP (India) and BK Aggarwal & Company (Nepal) – Chartered Accountants

Now let’s discuss this special audit. 

Why Was the Audit Necessary?

The audit was mandated by the International Monetary Fund (IMF) of the World Bank Group as a part of its requirements under the Extended Credit Facility (ECF). In simple terms, ECF is a financial assistance program by the IMF aimed at helping low-income countries facing prolonged economic difficulties. It provides low-interest loans over an extended period to support medium- to long-term structural reforms in areas such as fiscal policy, governance, and financial sector health. This year the IMF under the four-year ECF, allowed authorities to withdraw $41.3 million, taking the total disbursement of financial support to Nepal under the programme to US$247.7 million.
The IMF raised concerns about the rising Non-Performing Loans (NPLs) within Nepal’s banking system and suspected that banks were engaging in evergreening—the practice of rolling over bad loans to avoid default classification. The audit aimed to assess the credit quality of the banks, ensuring transparency and helping Nepal address potential systemic risks in its banking sector.

Why an External Auditor?

Nepal's banking system needed an independent, external audit to restore international confidence in the country's financial stability. Frankly speaking, the IMF was not confident with the audit of Nepali banks by Nepali auditors. Therefore, the IMF wanted an audit by an international audit firm to ensure the level of scrutiny or impartiality required by the IMF, especially given the complexity of identifying practices like evergreening. As per the IMF, an external auditor ensures improvement on governance, transparency, and accountability of any commercial banks.

Why Is the IMF Involved?

The IMF's interest in Nepal's banking sector stems from its involvement through the ECF. The ECF provides low-interest loans to help countries implement economic reforms that promote stability, including measures to address weaknesses in the banking sector.

As part of the ECF agreement, the IMF required that Nepal’s commercial banks undergo an independent audit to ensure they were managing their loan portfolios responsibly. The aim was to address risks before they could escalate into broader financial instability, which could undermine the country's economic growth and access to international credit markets.

Why Was the Bid Process Canceled?

Some news sources claim that the Nepal Rastra Bank (NRB) decided to cancel the bid process for appointing an international auditor due to several key concerns related to the competitiveness, budget, and timeline of the project. These reports suggest that the process faced several challenges, which ultimately led to the decision to halt the bid.

1. Lack of Competition: Only one firm, KPMG Assurance and Consulting Services, submitted a bid, raising concerns about the competitiveness of the process. NRB likely felt that proceeding with just one bidder would undermine the integrity and transparency of the process.
2. Budgetary Concerns: KPMG’s bid reportedly exceeded the NRB’s budget allocation for the audit, causing further delays and financial strain. The high cost of the audit might have been another factor in the decision to cancel the process.
3. Potential Delays: The cancellation of the bid process means further delays in fulfilling the IMF's requirements, which may complicate Nepal’s relationship with the IMF under the ECF. The audit was originally scheduled to be completed by December 2024, but the cancellation adds uncertainty to the timeline.

The cancellation of the bid process introduces significant delays in fulfilling the IMF's audit requirements under the Extended Credit Facility (ECF), originally scheduled for completion by December 2024. If the audit is not completed on time, it could lead to serious consequences for Nepal. The IMF might suspend or delay further disbursements, which are crucial for the country’s economic recovery. Additionally, failure to complete the audit could damage investor confidence, lower Nepal's credit rating, and hinder access to affordable international financing. Most critically, unresolved issues within the banking sector, such as rising non-performing loans, would remain unaddressed, increasing the risk of financial instability. These factors make timely completion of the audit essential for maintaining both financial stability and Nepal’s relationship with the IMF.

What Happens Next?

The NRB now faces the challenge of re-launching the bid process or finding alternative ways to meet the IMF's requirements for an external audit. Delays in the audit process could potentially slow down disbursements from the IMF under the ECF, which would negatively impact Nepal's economic recovery efforts.

The audit remains critical to ensuring transparency and stability in Nepal’s banking sector. Without addressing the issues flagged by the IMF, including rising NPLs and potential evergreening of loans, Nepal risks further financial instability, which could hinder its access to international credit and investment.

In summary, the cancellation of the bid process highlights both the complexities of organizing large-scale external audits and the challenges Nepal faces in meeting international financial standards under the IMF’s ECF program. The next steps for NRB will be crucial in determining how the country moves forward with the necessary reforms to stabilize its banking sector and maintain confidence among international investors.