Non-Performing Loans (NPL) In Nepal: Need For Faster And Deeper Monitoring

Nepal Rastra Bank implemented guidelines on working capital loans at the end of 2022 in order to prevent misuse of loans and to control the tendency of banks to pay interest by taking loans.

Aug. 14, 2023, 10:41 a.m.

It is seen that the bad loans of commercial banks have doubled in the last financial year 2079/80 when the country's economy was in recession. The fourth quarter financial statement of last year 2079/80 made public by the banks has shown that the situation of bad loans has increased. At a glance, it is seen that the average bad loan ratio of commercial banks has more than doubled from 1.2 percent in June 2079 to 2.7 percent in June 2080 B.S due to contraction in the economy and bad credit .

Some opine that the contraction of the economy is the main factor behind the recent increase in bad loans of commercial banks. When the economy shrinks, its impact is seen in the villages. Not only the big businessmen but also the small businessmen have seen the impact of economic contraction in the recent times.

Due to contraction in economic activity, people's cash flow has been affected, which has made it difficult for loan recovery. It has been analyzed that when the external and internal sectors of the economy gradually shrink, it has an impact on the banking sector as well.

In the last financial year 2079/80, the bad loans of five commercial banks have reached more than four percent. It is believed that bad loans are more risky than five percent.

Wrong lending practices:

Without proper appraisal procedures, sometimes a borrower is given a loan. Suppose a borrower inflates his income and manages to defraud the bank. So there is not much possibility of receiving payment from such a party. However, lending processes are now streamlined and have detailed “checks and balances”.

How do banks deal with NPAs?

It is very important for banks to keep bad loans (NPAs) low as it directly affects the income of banks. Moreover, regulators have strict guidelines about bad loans. Bad debt assessment In a broad sense, banks evaluate bad loans with two main criteria. If the borrower is willing to pay but is not able under the current circumstances then the route of debt restructuring is followed.

In the fiscal year 2079/90, bad loans of National Commercial Bank increased from 2.09 percent to 2.95 percent, while Nepal Bank's bad loans increased from 1.83 percent to 2.85 percent, NMB Bank's from 1.45 percent to 2.72 percent, Nepal SBI Bank's 0. It has increased from 15 percent to 2.43 percent.

Most likely, financial advisors will take steps to restructure the payment amount. If the borrower is able to pay but s/he is not willing to pay back and tries to avoid payment, it will be a threat to the bank. Such parties are dealt with through court cases with the assistance of the legal department.

It is clear that when there is a recession in the economy and economic activities are not running and the health of the economy begins to deteriorate, then there is no possibility that only the banking sector can remain untouched by the symptoms and effects of that disease. Since the banking sector itself is unhealthy, the entire economy will fall into a financial vicious circle, so various efforts are being made globally to maintain the cleanliness of this sector as a priority.

Merger is also a reason. Bad loans may have increased due to some problems in the classification of loans after the merger of big banks. It is not appropriate to impose a single rate of interest rate.

This is probably also said by the relevant authorities. Liquidity, interest rate increase, pressure in the external sector, all over the world.

We should not hesitate to say that there is a problem in Nepal's banking system due to the increase in prices.

Financial ease

Due to the laxity in the country's economy, the financial and monetary system suffered from a lack of investable funds for a long time. When the bank interest rate was above 12 percent, the borrowers who took the loan could not repay the loan. As a result, the non-performing loans (NPL) in the banking sector gradually increased and it was said again and again.

Positive perception towards the bank

As the credit of the bank and the negative perception towards the bank develops in the country, the banking sector remains in a state of panic. Therefore, even though the financial stability will be affected, the banking sector is still safe.

It seems that sufficient liquid assets are still in the banking sector. There is no situation where the deposit cannot be returned. In the past, it was seen that the ratio of bad or non-performing loans in Nepal's banking sector was at a low level, from the regulator of the banking sector, Nepal Rastra Bank to the government, in their reports on the macroeconomic situation.

Past non-performing loans in government banks

In the past two ecade , the ratio of non-performing loans (NPL) in two large government-owned commercial banks, Nepal Bank Limited and Rashtriya Banijaya Bank, reached over 60 percent and the entire financial system was in a state of collapse. The fact that the operation had to be done should not be forgotten under any circumstances.

Apart from that, a similar reform program was conducted with the help of Asian Development Bank (ADB) to improve the financial system of Agricultural Development Bank and NIDC.

After the reform, R.B Bank and NIDC are merged with each other. Despite this state of government banks, private sector banks cannot be said to be problem-free.

We have the bitter experience of Nepal Rastra Bank having to intervene in the management of some commercial banks in the private sector after the problems related to their governance escalated.

The banking sector is the engine for economic growth through productive funds. Acts as an enabler to achieve sustainable economic growth through the medium of efficient monetary policy . A strong economic system results from a strong financial system and is critical to addressing financial crises.

Non-performing loans (NPLs), along with other macroeconomic indicators, have been one of the key factors in countries experiencing banking crises. According to the research done by the International Monetary Fund (IMF) in different areas, the signal of banking crisis is getting stronger after the NPL ratio (proportion of total loans) exceeds the threshold of seven percent.

Provision for loan losses to cover losses due to bad loans reduces the capital required to provide later loans, bad loans negatively affect the bank's profitability and sustainability.

A significant amount of NPLs over time also indicates a risky portfolio of assets of banks and financial institutions, which limits liquidity and growth.

Bankers say that bad loans have increased in Nepal mainly because of non-recovery of loans. Banks are struggling to recover loans while the private sector is struggling due to rising lending rates and a sharp drop in market demand.

Bankers have said that there has been an increase in non-payment of loan installments and interest in this financial year.

If there was economic activity, it was expected that it would be easier for the debtor to pay the loan and interest on time.

Nepal Rastra Bank implemented guidelines on working capital loans at the end of 2022 in order to prevent misuse of loans and to control the tendency of banks to pay interest by taking loans.

The non-performing loans of the banks have also increased because the businessmen and industrialists who took loans from the banks to pay the interest could not pay the interest after the implementation of the working capital loan guidelines.

As a large amount of money has to be set aside for the provision of bad loans, the increase in bad loans has also affected the profitability of the bank.

Bankers say that when the interest rate is high and the economy slows down, there is a rush to collect loans because even the small and medium entrepreneurs-businessmen have lost their jobs. At present, some banking institutions have a tendency to give more loans only to big borrowers, because they do not classify the loans of big borrowers in the absence of debt recovery, and there is a tendency to increase the loan itself.

It is clear that when there is a recession in the economy and economic activities are not running and the health of the economy begins to deteriorate, then there is no possibility that only the banking sector can remain untouched by the symptoms and effects of that disease. Since the banking sector itself was unhealthy, the entire economy will fall into a financial vicious circle, so various efforts are being made globally to maintain the cleanliness of this sector as a priority.

The Credit Information Centre has been put into operation since 1st May 2046 to prepare a list of those who embezzle loans, do not pay loans on time or commit other financial crimes and manage the risks of loans.

Nepal Rastra Bank has a provision that a person or organization can be blacklisted based on various circumstances. If the borrower goes missing or is not contacted for 90 days, if the loan principal or any installment or interest payment date exceeds one year, the borrower is blacklisted.

If the borrower does not repay the loan within the loan period, the bank and financial institution initiates the loan recovery process according to the law or if it is proved that the borrower has misused the loan, he is also blacklisted.

Similarly, if money is cheated using fake cheques, drafts, foreign currency, credit/debit cards, bills etc. Those who issue checks without sufficient funds in their accounts are also blacklisted.

Now the number of blacklists is also increasing due to this reason. During the corona period, the Rastra Bank gave a concession to the borrowers that the assets secured by such loans cannot be auctioned for a period of 6 months.

Now the grace period has expired. Banks are running the mortgage recovery process.

In this way, when banks and financial institutions carry out debt recovery proceedings according to the law, the debtors are blacklisted. Similarly, after the financial year 2075/76, the blacklisting of check issuance (check bounce) without sufficient amount in the account was tightened.

Due to the occurrence of such incidents, the number of those who are blacklisted is increasing at a rapid rate in recent years. In addition, during the corona period, the business of some debtors was built.

Some of the debtors have not yet recovered. On the other hand, many people could not pay the interest because the real estate business was stopped.

This has also increased the number of blacklists. At present, some banking institutions have a tendency to give more loans only to big borrowers, because they do not classify the loans of big borrowers in the absence of debt recovery, and there is a tendency to increase the loan itself.

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