Kathmandu. Banks are still struggling to recover bad loans. Bad loans are increasing due to weak repayment capacity of borrowers. However, the amount to be set aside for potential loan loss has decreased. Although the expected improvement in loan recovery has not been seen, the reduction in provision has brought relief to the profits of the banks.
In the current fiscal year 2083. In the first quarter of 20 years, the average non-performing loan ratio of 20 commercial banks has reached 5.64 percent. In the same period of the previous financial year, this ratio was 4.86 percent. Passive loans increased by 0.78 percentage points in a year. This shows that the challenges in recovery of loans of banks are still there.
However, during the same period, the amount allocated by banks for loan loss management has decreased by 44.9 percent. This amount has come down to Rs 11.09 billion from Rs 20.14 billion in the first quarter of last year. This means that the amount allocated by banks for potential loan loss management has been reduced by about Rs 9 billion.
When the provision amount is reduced, the expenditure of the banks decreases. It has a direct impact on the net profit. In the first quarter of the current financial year, the net profit of commercial banks has crossed Rs 19.14 billion. While the non-performing loans are increasing, the reduction in the provision seems to have given further relief to the profit of the banks.
Banks have been claiming that the recovery drive has been intensified, the classification of some loans has improved and the need for previously allocated provisions has decreased. They believe that the reduced interest rates have made it easier for the borrowers to repay.
What is the basis for the reduction of the provision?
The decline in loan loss management is also not the same across all banks. Nabil Bank’s provisions declined by 74.66 per cent, while those of Sanima, Kumari, Rastriya Banijya Bank and Nepal Investment Mega Bank also declined by more than 60 per cent. However, Prime Commercial Bank’s provisions increased by 28.30 per cent to Rs 61.71 crore. This shows that the status of banks’ loan portfolio and risk assessment is different.
The reason for the reduction in the amount allocated in the loan loss system may be due to the reduction in loan recovery, improvement in the classification of loans or the reduction in the need for earlier arrangements. However, when the non-performing loans are increasing, the reason for the reduction of the provision needs to be clear. If the provision is reduced without improving the loan recovery, then it can put the banks at more risk in the future.
When the provision is reduced, there is immediate relief in the profit and distributable profit of the banks. However, if the loan recovery is weak later and there is a need to make more provision, it may affect the profit and capital fund.
