Kathmandu. As the management of bad loans in Nepal’s banking sector becomes more challenging, banks are piling up of non-banking assets that they have to hold as collateral.
Last Fiscal Year 2082 was released by Nepal Rastra Bank. As of mid-June 2018, the non-banking assets of the 20 commercial banks in operation stood at Rs 46.80 billion. This is an increase of 18.89 percent compared to the same period of the previous year. This has exposed the country’s sluggish economic activity and the weak capital mobilization capacity of the borrowers.
According to analysts, the rise in non-banking assets is not a good sign for the health of the banking system. The failure of borrowers to pay the principal and interest on time and the failure of the bank to recover the mortgage prove that there is a cyclical slowdown in the market. If economic activities do not pick up pace in the coming days and real estate transactions are not smooth, the burden of such non-performing assets on the balance sheet of banks will increase further.
According to the data, the previous fiscal year 2081. As of mid-June 2018, commercial banks had such assets worth Rs 38.79 billion. However, in the last one year, Rs 8.10 billion has been added to such assets.
If the loan issued by the banks is not recovered and no one accepts it during the auction, then the bank itself has to bring such collateral (house, land or other movable or immovable property) in its name, which is called non-banking property. Such an increase in wealth means that the bank’s capital is frozen in ‘one and a half assets’. This directly affects the profitability and liquidity of the bank.
Himalayan Bank (HBL) has emerged as the largest non-banking bank in the country. Himalayan Bank has assets worth Rs 6.23 billion. Likewise, Global IME Bank has the total assets of Rs 5.89 billion and Mega Bank has the total assets of Rs 4.70 billion.
Similarly, NIC Asia Bank has accumulated non-banking assets worth Rs 4.17 billion. These figures indicate that the risk of bad loans and mortgage management in large banks is high.
Standard Chartered Bank, by contrast, has shown enticing financial discipline, maintaining its non-banking assets ratio to zero. Billions of dollars of assets have been frozen in banks other than Standard Chartered.
Nabil Bank has assets worth over Rs 3.38 billion, Kumari Bank Rs 2.45 billion, Laxmi Sunrise Bank Rs 2.44 billion and NMB Bank Rs 2.01 billion. Although the government-owned Agriculture Development Bank has Rs 1.38 billion, Nepal Bank (Rs 233.6 million) and Rastriya Banijya Bank (Rs 310.4 million) have less assets than other private banks.
Due to the slowdown in the real estate business and the slowdown in the construction sector, the banks have not been able to sell the securities offered in the auction. When a bank auctions a collateral and there is no buyer in the market, the bank has a legal obligation to transfer the property to its own name. However, holding such assets for a long time not only does the bank not earn interest income from it, but also has to allocate the amount to provisioning. This is also reducing the earnings per share and dividend distribution capacity of the banks.
