KATHMANDU, July 28: Nepal Rastra Bank (NRB) has increased the threshold for provisioning on loan loss to up to five percent on the credit provided by the banks and financial institutions (BFIs) targeted at the COVID-affected businesses.
The central bank has taken the move on the suspicion that an excess credit provided by the BFIs during the impact period of the coronavirus could have been channelized into unproductive spending. According to the NRB records, the BFIs extended their loan portfolio by an additional Rs 898 billion in the last fiscal year. Despite providing a hefty amount of loan, the economic growth appeared dismal in the last fiscal year.
A loan loss provision is an income statement for expenses that the BFIs need to set aside to allow uncollected loans and loan payments. The BFIs are required to account for potential loan defaults and expenses to ensure they are presenting an accurate assessment of their overall financial health. However, an increase in loan loss provision amount could hit the profit earnings of the financial institutions.
Revised interest rate corridor system introduced
Revising the Unified Directive on Monday, the central bank increased the loan loss provision by 0.3 point percent on the credits that fall within ‘good loans’ criteria issued by all A, B and C class financial institutions. In the revised rule, the BFIs have to maintain the loan loss provision at 1.3 percent from 1 percent earlier on such credits while preparing their annual financial statement.
Citing the impacts on the quality of the banking assets due to the COVID-19 pandemic, the directive has been enforced to maintain stability in the entire financial sector, reads the NRB’s revised directive.
“As the economy could not gain pace compared to the loans injected, we suspect that the money is being used in unproductive spending. The threshold of provisioning has been increased to minimize possible threats to the country’s financial stability that could be created by unproductive spending,” said Bam Bahadur Mishra, deputy governor of NRB.
Similarly, the central bank has also asked the BFIs to maintain provisioning of five percent of the loan amount in case the additional loans provided for the recovery of COVID-suffered businesses remain doubtful. The BFIs can extend the settlement period of the loans in this criteria by up to one year.
