Kathmandu. Muktinath Bikas Bank, which is in the race to become a commercial bank by aggressively expanding loans, is under pressure from bad loans.
The bank’s non-performing loans rose to 4.88 percent, especially as the quality of aggressive investment made with small and medium businesses, consumer loans and branch expansion has been weakening. The impact of sluggishness in economic activity, declining repayment capacity of borrowers and risky loan management is now visible in the financial statements of banks. Despite the increase in profits, the bank’s credit quality has been deteriorating, raising questions about Muktinath’s expansion strategy.
In recent years, Muktinath had adopted a strategy of aggressively increasing loans along with the expansion of branches. Banks have seen rapid expansion in small businesses, hire purchases, personal and collateral-based loans, especially in rural and semi-urban areas.
Although this strategy of increasing market share in the short term has helped to expand the business immediately and increase interest income, it is now having an impact on the quality of loans. Credit expansion without adequate risk assessments, poor monitoring and aggressive investment beyond the borrower’s actual repayment capacity appear to have contributed to the increase in the bank’s non-performing loans. Now, with the slowdown in economic activity, the same loans disbursed in the past have become a headache for the banks.
The current financial year of the bank is 2082. The financial statements for the third quarter of FY83 showed a superficial increase in profit, but indicated that pressure is mounting on the bank’s core financial indicators. In particular, the bank’s financial quality has been questioned by rising non-performing loans, shrinking non-interest income, low spread rates and limited dividend capacity.
The credit quality of the bank is under pressure. The non-performing loan of the bank has increased to 4.88 percent. At a time when bad loans are increasing in the banking sector, its impact has been evident in Muktinath as well. Passive loans approaching 5 percent is considered a risk sign for any bank.
The risk of small and medium business loans, especially in development banks, is high. At a time when the bad loans of the banks are increasing, the pressure on the credit quality of Muktinath is also increasing due to the sluggishness in economic activities, decrease in business transactions and weakness in the repayment capacity of the borrowers.
In the first nine months of the current fiscal year, the bank has deposited Rs 118.11 billion and extended loan to Rs 98.22 billion. However, the lack of improvement in loan quality with the expansion of the business seems to be a matter of concern for the banks.
Although the net interest income, which is the main source of income, has increased, the non-interest income of the bank has weakened. In the review period, the net fee and commission income decreased to Rs 390 million. At a time when digital services, transactions, and alternative income streams are expanding in the banking sector, the decline in income shows that diversification of the bank’s income structure is weak.
On the other hand, the base rate of the bank has come down to 5.83 percent and the interest rate spread has also come down to 4.48 percent. The reduction in the spread rate means that the interest income margin of the bank is under pressure. The impact of increasing competition among banks and falling interest rates has also been seen in Muktinath.
The indicators of returns are also not significant. The return on equity (ROE) of the bank is only 10.38 percent. Although the earnings per share has reached Rs 15.71, the bank’s return capacity is still limited.
After the regulatory adjustment, the distributable profit of the bank stands at Rs 370 million. Including the accumulated profit of the previous year, the total profit has reached about Rs 44 crore. On this basis, the annualized dividend of the bank appears to be only about 7 percent. This indicates that the bank’s ability to distribute dividends is not immediately strong.
Tara Manandhar has been appointed as the new Chief Executive Officer (CEO) of the bank. He took charge of the office from May 1. He has the challenge of correcting the mistakes of past CEOs. He has a big challenge to strengthen the financial condition of the bank. Experts say that Manandhar, who has enough banking experience, will work on the policy and it will show the future of the bank.
