Nepal’s Financial Institutions Turn to Debt Recovery Tribunal Amid Rising Bad Loans
Banks and financial institutions (BFIs) in Nepal have increasingly sought the assistance of the Debt Recovery Tribunal (DRT) after struggling to recover substantial amounts of bad loans.
According to DRT records, BFIs filed 386 cases against borrowers in the first half of the current fiscal year. Of these, 331 were from commercial banks, 40 from development banks, and 15 from finance companies.
Many of the cases involve defaults by construction companies, with others arising from businesses in sectors such as grocery stores, jewelry shops, furniture outlets, gas depots, hospitals, agriculture, resorts, and banquet halls.
The financial institutions are seeking to recover over Rs 5.12 billion from borrowers, with commercial banks alone claiming more than Rs 4.84 billion.
Santosh Koirala, president of the Nepal Bankers’ Association, explained that the DRT’s help was essential because banks were unable to recover the loans due to various challenges. “With bad debt ratios rising, we are encountering difficulties in obtaining recommendations for ownership transfer from local authorities, as well as facing non-cooperation from the concerned individuals,” Koirala said during a program on Tuesday.
The DRT, a judicial body, was established to aid BFIs in recovering bad debts that they failed to collect on their own. Ensuring the recovery of such loans is vital to maintaining the financial stability of these institutions.
As per the law, BFIs must file cases against defaulters within four years after loans are classified as bad debts. However, with an increasing number of bad debts, BFIs are now filing cases even for loans categorized as substandard, according to bankers.
Loans are classified into three categories based on overdue periods: substandard loans (up to six months overdue), doubtful loans (six months to one year overdue), and bad loans (over one year overdue).
The rise in non-performing loans (NPLs) has become a growing issue for BFIs. Financial reports from commercial banks reveal that their average NPLs increased to 4.33% by the end of the fiscal year, up from 3.66% previously. In some cases, the NPLs of individual entities have reached as high as 6.96%.
Similarly, development banks report an average NPL ratio of 5.36%, while finance companies are facing a higher NPL ratio of 8.13%.
