Commercial banks of Nepal succeeded in reducing the ratio of their bad debt by 3.34 percent in the last three months of the last fiscal year.
A report of Nepal Rastra Bank (NRB) shows that the bad debt of banks had soared to 3.89 percent of their total loan portfolio by mid-April. The ratio dropped to 3.76 percent as of mid-July of the fiscal year 2023/24.
According to the bankers, the banks priority to recover their non-performing loans rather than issuing new loans had led to an improvement in the recovery process during the period. “The situation improved also because the borrowers were prompted to turn up for clearing their debt amount in the final period of the fiscal year,” said a banker.
With economic slowdown triggered by a fall in aggregate demand in the economy in the last fiscal year, the banks were unable to increase their lending, while they struggled to recover loans they issued to their customers. As of mid-January 2023, the figure was 2.63 percent, while it was only 1.16 percent as of mid-July 2022.
In the first quarter of the FY 2023/24, the ratio of bad debt soared to 3.61 percent. It stood at 3.63 percent in the second quarter and at 3.89 percent in the third quarter of the review year.
Based on the period of the overdue of the loans issued by the banks, the NRB categorizes NPLs as sub-standard, doubtful and bad loans. The substandard loans are those loans whose interest and principal payments are due up to six months. The doubtful loans are those in which payments remain due for six months to one year, while the overdue period is more than one year in case of bad loans.
For the substandard loans, the bank and financial institutions (BFIs) have to maintain 25 percent of the amount in provisioning. In case of doubtful loans, the provisioning amount is 50 percent, while for the bad debts; banks need to maintain a cent percent amount in provisioning.
The ratio of bad debt declined also after the central bank through the monetary policy adopted flexible policy in loan repayment by the banks’ clients. The monetary policy has extended the deadline for the payment of principal and interest on loans disbursed to construction entrepreneurs till November 2024. Likewise, it has permitted the BFIs to waive blacklisting of the borrowers if they clear the past dues and continue paying interest amount against the loans they have taken.
Meanwhile, the bad debt of development banks also declined to 3.62 percent from 3.63 percent during the review period. Likewise, finance companies also succeeded in lowering their bad debts to 9.87 percent from 10.40 percent.
Banks improve their capital adequacy ratio
The commercial banks have improved their capital adequacy position in the last three months of the fiscal year 2023/24.
Until some time ago, banks were facing hurdles to issue more loans due to having low capital adequacy ratio, but they are now in a comfortable position in this regard. A report of Nepal Rastra Bank (NRB) shows except NIC Asia Bank, rest of the 19 commercial banks now have capital adequacy funds in the prescribed threshold.
According to the Capital Adequacy Framework 2015 enforced by the NRB, banks need to maintain a capital adequacy ratio of 11.5 percent. In the tier-1 capital, nine percent of the CAR should be maintained from the core capital while the additional 2.5 percent should be maintained from tier-2 capital (supplementary capital).
The BFIs cannot expand their lending if they do not maintain the capital adequacy fund at the prescribed level. According to NRB officials, it is one of the main factors that barred the BFIs from issuing more loans despite having sufficient liquidity with them.
According to the latest report, Standard Chartered Bank has the highest capital adequacy ratio at 17.16 percent. NIC Asia Bank stood at the lowest with its capital adequacy ratio of 11.18 percent.
