KATHMANDU, Jan 1: At least nine finance companies have exhausted their reserves, where profits made over the years are parked, in a sign they may eventually land up in trouble if corrective measures are not taken immediately. This has directly hit their net worth and core capital - two indicators that display financial strength of an institution.
Arun Finance, CMB Finance, Gorkha Finance, Hama Merchant and Finance, Imperial Finance, Lalitpur Finance, Nepal Finance Limited (Nefinsco), Patan Finance and Prudential Finance recorded a negative reserve and surplus - which comprises shareholder equity in the form of retained earnings - in the first quarter of the current fiscal year as they suffered heavy losses due to accumulation of bad debts, unaudited first quarter balance sheets of these finance companies show.[break]
Of these, Lalitpur Finance and Nefinsco were earlier warned of prompt corrective action by Nepal Rastra Bank (NRB), the banking sector regulator, while CMB Finance has merged with two other finance companies to turn into Synergy Finance.
“Companies post negative reserve and surplus after suffering heavy losses. But if the losses were recorded due to problems, other than governance, these companies have chances of bouncing back,” Parshuram Kshettri, former CEO of Bank of Asia Nepal, told Republica.
However, there is a caveat. “Since problems in many domestic financial institutions usually crop up because of bad governance, possibilities of such companies plunging deeper in hole cannot be ruled out,” Kshettri said.
The unaudited balance sheets show that six of the nine companies - Arun, Imperial, Lalitpur, Nefinsco, Patan and Prudential - posted net losses in the first quarter of the current fiscal year. The rest suffered heavy losses in the past which corroded their reserves.
If these institutions fail to boost their performance, they may gradually fail to meet regulatory requirement of 5.5 percent core capital ratio - a comparison between core capital and total risk weighted assets - which may prompt NRB to take action.
A quick scan of the balance sheets of nine finance companies shows that the situation is most precarious at Prudential Finance. This is because the size of negative reserve at the company has been growing for the last one year from Rs 8.20 million in the first quarter last fiscal year to Rs 64.13 million in the fourth quarter of the year and Rs 178.12 million in the first quarter this fiscal year.
This is the same with Arun Finance, whose size of negative reserve grew from Rs 111.79 million in the first quarter last fiscal year to Rs 118.32 million in the first quarter this fiscal year.
The situation is also worrying at Gorkha Finance, Patan Finance and Imperial Finance, which maintained a positive reserve and surplus until a year ago. These companies now have a negative reserve of Rs 43.49 million, Rs 36.94 million and Rs 1.36 million, respectively.
The only company which has made some improvement is Hama Merchant, which reduced negative reserve from Rs 48.95 million in the first quarter of last fiscal year to Rs 30.31 million in the fourth quarter of same fiscal year and further down to Rs 23.77 million in the first quarter this fiscal year. This is because the company that posted a net loss of Rs 23.61 million in the first quarter last fiscal year started posting profit since then. Yet the company´s non-performing loans stand at an alarming 38.49 percent.
Since generation of profit is key to maintaining a positive reserve and surplus, these companies can revive only if they boost their performance by recouping the bad debts, Kshettri said.
Related story
Desperate search for missing girls as nearly 80 dead in Texas f...
-1770648553.webp)
