Amid ongoing slump in the economic activities of the country, non-performing loans (NPL) of the commercial banks of Nepal have been reportedly doubled as of mid-January compared to the figure in the same period of last year.
According to the monthly report on Banking and Financial Statistics of Nepal Rastra Bank (NRB), the commercial banks’ NPL have increased from 1.31 percent to 2.63 percent in the past one year. As of mid-July 2022, Nepal had an NPL of only 1.16 percent in its banking system, which however increased to 1.98 percent in mid-October.
Bankers say that the ongoing slowdown of the economy, political instability and defective NRB policy are among the factors that have contributed to an increased NPLs. “The situation has come up after NRB removed the refinance facility that it had been providing to entrepreneurs since the impacts of the COVID-19 pandemic,” said a banker.
The ratio of non-performing loans to total loans measures the health and efficiency of a bank by identifying the problems with asset quality in the loan portfolio. Lower the value of NPLs, lesser will be the financial risk to the banks and financial institutions (BFIs).
Based on the period of the overdue of the loans, the central bank has categorized 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.
A number of studies conducted by the umbrella organizations of the private sector have shown that the aggregate demand has fallen by a notable amount in recent days. The record with the National Statistics Office shows that the country’s economic growth stood at a mere 0.8 percent in the first quarter of the current fiscal year.
Amid dwindling businesses, soaring consumer prices and exorbitant interest rates, the cases of banking offense are also on the rise. While entrepreneurs have been protesting against banks’ high interest rates, few of them have been publicly refusing to pay back loans to the banks. “Banks have been unable to increase lending to expand their business whereas entrepreneurs suffer increasing financial liabilities along with a fall in their businesses, just because of the high interest rate,” the source said.
The NRB has limited the threshold of the NPLs of commercial banks to a maximum of five percent. Although the current figure is less than the prescribed threshold, the rising NPLs is alarming for banking business, according to bankers.
