Stress test analysis of Nepal Finance Limited : A strategic perspective

Abstract

Along with the global recession and inclusion of the various risk had increased the vulnerability of financial institutions and it had affected Nepal too. Because of the global recession, BCBS has introduced the concept of stress testing which is one of the effective and popular ways to alert bank management with regard to adverse unexpected outcomes related to variety of risks and provides an indication how much capital might be needed to absorb losses, if such large shocks occur. In this paper, stress test of Nepal Finance Limited has been conducted completely based on the Stress Test Guidelines, 2012 issued by Nepal Rastra Bank. The various shocks on credit risk, liquidity risk and market risk has been carried out its some negative worst case scenarios on which the CAR has been declined to less than 11% and if it happens, PCA will be imposed by NRB. Finally, management implications have also been stated which help the senior management, Board of Directors, depositors, shareholders and all other stakeholders of Nepal Finance Limited for the respective benefit. Key Words: Stress testing, Strategic management, Risk, Credit risk shocks, Liquidity risk shocks, Interest rate shocks, Capital adequacy ratio