IFC, NRB launch guidelines to help banks manage risks
Kathmandu, May 28
IFC, a member of the World Bank Group, has assisted Nepal Rastra Bank (NRB), the central monetary authority of Nepal, in developing the country's first Environmental and Social Risk Management (ESRM) guidelines for financial sector. The guidelines will help financial institutions evaluate environment and social (E&S) risks that could arise from transactions with clients, and take measures to mitigate them.
The traditional risks intrinsic to financial institutions pertain to credit and market. But the way their clients/investees manage environmental and social impact of their operations can also pose substantial risks to financial institutions. If left unmanaged, these risks can adversely impact financial institution's reputation, and could even result in costly litigation and loss of revenue, ultimately leading to rise in non-performing loans.
ESRM guidelines set down standards for the identification, assessment, and management of E&S risks. They list acceptable thresholds of environmental and social performance, E&S due diligence, and monitoring reports. There are general and sector-specific tools and checklists and sector-wise lists of permits and licences that financial institutions can apply to make their evaluations. Hydropower-related E&S criteria have been given special attention, as per a media release.
If E&S impact is unavoidable, measures have been suggested to mitigate them to the extent possible. The guidelines also provide a reporting template for all banks to report to NRB on sustainability performance. This will ensure all banks, including private ones, adopt better environmental, social, and governance standards.
“Improved E&S risk management practices will help minimise potential risks, generate business opportunities and boost the regional competitiveness of our banks and financial institutions. They will create increased access to financing for businesses with strong environmental and social performance.” NRB Governor Chiranjibi Nepal has been quoted as saying.
IFC will now train officials at Nepal's financial institutions in assessing and administering guidelines and evaluating reports. IFC is keen to scale-up sustainable hydropower development in Nepal, promote financial inclusion, and boost tourism infrastructure through investments in manufacturing, agro-business and services industries.