Kathmandu. A serious question has arisen in recent times regarding the financial health of Nepal’s banking sector: Do the financial statements released by the banks speak the real situation?
The independent loan portfolio review of 10 major commercial banks initiated by Nepal Rastra Bank (NRB) has confirmed that there is a huge gap between the data and reality shown by the banks. In the third quarter of the current fiscal year, the average non-performing loan was shown at 5.41 percent. However, a micro-study by Bangladeshi consultancy Hauladar Yunus & Co has shown that the real average non-performing loans of these banks have reached 7.6 percent.
This has raised serious doubts about whether the banks in Nepal are hiding bad loans or adopting flexibility in classification to make their balance sheets look good. In an interaction with journalists a few days ago, the Confederation of Banks and Financial Institutions Nepal said that the directors of the banks were compelled to hide the bad loans.
The trial was conducted under the NRB’s fourth strategic plan and IMF’s extended credit facility, which included 10 big banks in Nepal: Global IME, Nabil, Nepal Investment Mega, Kumari, Rastriya Banijya Bank, Laxmi Sunrise, Himalayan, NIC Asia, NMB and Prabhu Bank. The data released by these banks shows that the situation of non-performing loans is somewhat normal, but an independent audit has pointed out that the quality of loans is very poor.
According to the report, the average non-performing loan of 10 banks reached 7.6 percent, which is well above the ‘risk limit’ of 5 percent set by the Nepal Rastra Bank. Similarly, the average capital adequacy ratio of banks has also come down to 11.30 percent. This indicates that the ability of banks to lend more or bear risk is weakening.
According to the details released by the banks till mid-April, out of the total loan disbursement of Rs 5.24 trillion, only Rs 283 billion was non-existent. However, the report indicates that this size is much larger.
For example, Prabhu Bank’s NPL is 8.84 percent, Nepal Investment Mega Bank’s 8.41 percent and Himalayan Bank’s 7.98 percent. Some banks have shown their bad loans (Nabil 0.98 percent and NIC Asia 0.49 percent). But the independent audit’s average figure of 7.6 per cent raises questions about the credit quality of these so-called “good” banks.
According to banking experts, the trend of banks ‘evergreening’ loans and technical changes in loan classification have prevented the actual bad loans from coming out. However, the real picture has come out after a rigorous analysis of the qualitative and quantitative aspects of the loan conducted by the foreign company as per the international standards.
After the release of this report, a ‘red alert’ has been issued in the banking sector. Passive loans reaching 7.6 percent pose a challenge to the safety of depositors’ money and overall financial stability. Nepal Rastra Bank (NRB) has stated that the suggestions pointed out in the report will be gradually implemented and steps will be taken to reduce the risks.
However, the trend of hiding genuine bad loans is sure to not only reduce the profitability of banks but also take a big hit to their dividend distribution capacity and creditworthiness. Showing one data in the data and another in reality can also threaten confidence in banking governance. Now, instead of doing ‘beauty parlours’ and showing their reports well, banks should focus on real loan recovery and quality improvement.
