Kathmandu. KATHMANDU: The loan portfolio review conducted by Nepal Rastra Bank (NRB) on 10 commercial banks has raised serious questions about the real financial condition of the banking system in Nepal. According to a report by Bangladeshi consultancy Hauladar Yunus & Co., a large proportion of the loans that banks have shown to be “good” over the years appear to be genuinely risky. <\/p>\n
According to the report, the capital fund of some banks is under pressure due to the need to make additional loan loss provisioning. According to sources, the capital fund ratio of some banks may fall below the regulatory limit. <\/p>\n
As per the directive, commercial banks should maintain primary capital fund ratio of 8.5 percent and total capital fund ratio of 11 percent. However, the data shows that the average primary capital fund ratio of the banks was 9.48 percent and the average total capital fund ratio was only 12.49 percent as of January 2022. <\/p>\n
Among the listed banks, Global IME Bank, Nabil Bank, Nepal Investment Mega, Rastriya Banijya Bank, Kumari Bank, Laxmi Sunrise, Prabhu, Himalayan Bank, NMB Bank and NIC Asia Bank saw their primary capital fund ratio below 9 percent. It is estimated that some of these banks may fall below the regulatory limit due to the additional risk provisions pointed out in the report. <\/p>\n
One of the most serious findings of the report is the suspicion that banks are “evergreening” on large project loans. That is, the situation of new loans has been found in the test to keep the old debt looking good. The report states that although the physical progress of the project has been weak, the loan amount has been increasing, but the banks have not kept adequate on-site inspection and progress evidence. This indicates that the real risk is being concealed by artificially making the bad loan look good. <\/p>\n
According to sources, the average non-performing loan ratio of the banks included in the test was 7.70 percent. This is significantly higher than the average non-performing loans issued by banks. This indicates that there is a huge gap between the situation in the financial statements of the banks and the actual risk. <\/p>\n
Currently, banks are required to provide 1 percent loss for good loans, 5 percent for micro-monitoring, 25 percent for low, 50 percent for suspicious loans and 100 percent for bad loans. The strict implementation of loan classification has put a direct pressure on both the profit and capital of the banks. <\/p>\n
As per the NRB rules, if the capital fund ratio falls below 25 per cent of the prescribed threshold, it will demand reform plan, ban dividend distribution and branch expansion, and stop increasing the salary and allowances of the directors and executives. If the capital fund falls below 50 percent, the expansion of deposits and loans can be stopped and if it falls below 75 percent, it can be declared problematic. This is the reason why regulatory pressure on banks is expected to increase after the report. <\/p>\n
The report also indicates that the impact of aggressive credit expansion by banks in recent years is now coming to the surface. After the pandemic, banks had expanded loans rapidly. The emphasis was on increasing market share rather than the actual potential, cash flow and quality of collateral. Now, as the quality of the same loan is deteriorating, the banks are under pressure for more provisioning and capital management. <\/p>\n
The board of directors of Nepal Rastra Bank (NRB) has already approved the report submitted by Hauladar Yunus & Co last week. According to sources, the Department of Regulation and Supervision is now preparing to instruct the banks to improve efficiency. The International Monetary Fund (IMF) had appointed an international consultant to conduct a study after the International Monetary Fund (IMF) had put a condition that the credit quality of 10 big commercial banks should be examined before providing extended credit facility. <\/p>\n
According to banking sector experts, this report has removed the make-up of the Nepali banking system and shown the real situation. How strongly the NRB takes corrective measures now will determine the confidence in the banking system in the coming days.<\/p>\n","protected":false},"excerpt":{"rendered":"
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