KATHMANDU, Dec 18: Bad debts of banks and financial institutions (BFIs) have continued to rise in the past one year as lenders struggle to recover outstanding loans.
According to Nepal Rastra Bank (NRB), the average non-performing loan (NPL) ratio of commercial banks stood at 5.03 percent as of mid-November, up by 0.75 percentage points over the past year. In the same period last year, the 20 commercial banks had an average NPL ratio of 4.28 percent.
Likewise, the bad debt of development banks increased by 1.66 percentage points to 6.03 percent during the review period. As of mid-November 2024/25, the B class financial institutions had their non-recovered loans at 4.37 percent. Similarly, bad debts of finance companies also went up to 12.52 percent from 10.84 percent during this period.
Revised interest rate corridor system introduced
Bankers say they have been facing more difficulties to recover their outstanding loans mainly due to the impacts of the Gen Z movement. “While it was already a difficult task due to the protracted economic slowdown, the recent political unrest has aggravated the situation,” said a banker on condition of anonymity.
Based on the overdue period of loans issued by banks, the NRB classifies non-performing loans into three categories: substandard, doubtful, and bad loans. Bad loans refer to those with an overdue period exceeding one year. In case of the bad loans, the concerned BFIs need to maintain cent percent of the loan amount in provisioning.
Citing the cases of depleting financial health of the BFIs due to this reason, the NRB has recently revised the provision to categorise bad debts. As per the revised rule, it is not mandatory for BFIs to categorise outstanding dues as bad loans if the borrowers resumes payments of installment even after the BFIs starts auctioning the securities against issuance of loans. Earlier, the outstanding dues were automatically considered bad loans once auction started or BFIs filed cases at the court against the defaulters.
Due to the soaring bad debts, the non-banking assets of BFIs have also increased by a notable amount. The records with the NRB show that such assets of BFIs increased 33.49 percent to Rs 51.07 billion in the past one year.
Non-banking assets are fixed properties kept as collateral by borrowers, which banks auction off when loans turn into bad debt. Banks can write off the provisioning amount of bad debts using proceeds from auctioned collateral.
As of mid-November this year, the non-banking assets of commercial banks stood at Rs 43.19 billion. Such assets of development banks and financial companies were recorded at Rs 4.84 billion and Rs 3.04 billion, respectively.
