KATHMANDU, Nov 1: The nonperforming loans (NPL) of Nepali commercial banks have increased by a notable amount in the first three months of the current fiscal year, after the borrowers failed to pay back the banks’ loans on time due to excessive interest rates.
According to the monthly report on Banking and Financial Statistics unveiled by Nepal Rastra Bank (NRB), the banks’ NPLs have increased from 1.14 percent to 1.76 percent in the past one year. As of mid-October, the banks have provided a total loan of Rs 4.22 trillion.
The NRB has posted a dismal picture of Nepal’s banking business just on the next day of the World Bank’s report that has underscored the good financial health of Nepali banks. As of mid-July 2022, Nepal had an NPL of only 1.16 percent in its banking system; the lowest among the South Asian countries, the multilateral lending institution has stated in its report.
Revised interest rate corridor system introduced
The ratio of nonperforming loans to total loans measures the health and efficiency of a bank by identifying the problems with asset quality in the loan portfolio. Lower the value of NPLs, lesser will be the financial risk to the BFIs.
According to NRB, out of the 26 commercial banks in the country, the NPLs of Nabil Bank, Global IME Bank, Siddhartha Bank, Himalayan Bank, Sunrise Bank and Bank of Kathmandu, in particular, have increased by a notable amount. Based on the period of the overdue of the loans, the central bank has categorized NPLs as sub-standard, doubtful and bad loans.
The substandard loans are those loans whose interest and principal payments are due up to six months. The doubtful loans are those in which payments remain due for six months to one year, while the overdue period is more than one year in case of the bad loans.
With rising NPLs, provisioning amounts of the banks have also increased significantly during mid-July and mid-October. According to NRB, the banks have maintained an additional Rs 8 billion in loan loss provisions against NPLs during the period. Banks need to maintain 100 percent of the bad debt in provision, which is the non-earning asset of the banks.
The increasing NPLs and provision amounts have been attributed to the soaring interest rates of the banks. Vishnu Kumar Agrawal, president of the Confederation of Nepalese Industries, said entrepreneurs have been unable to pay back loans due to high interest rates of the banks.
In August 2021/22, the interest rate on banks’ loans was around 8.57 percent on an average, which has almost doubled now.
