By Shanker Man Singh
It is clear that when there is a recession in the economy and economic activities are not running and the health of the economy begins to deteriorate, then there is no possibility that only the banking sector can remain untouched by the symptoms and effects of that disease. Since the banking sector itself is unhealthy, the entire economy will fall into a financial vicious circle, so various efforts are being made globally to maintain the cleanliness of this sector as a priority.
In the past, it was seen that the ratio of bad or non-performing loans in Nepal’s banking sector was at a low level, from the regulator of the banking sector, Nepal Rastra Bank.
If you look at the balance sheets published by the banks, there is no reason to disbelieve this statement, but the question is seriously raised whether the picture shown is real or the sparks of fire are hidden by covering it with ash. In the past, in general, the decrease in the ratio of non-performing loans in the banking system was also a sign of a healthy financial system, it contributed to the healthy development of the economy as a whole, but to make the balance sheet look healthy, bad loans are temporarily shifted to other titles and hidden by manipulating the calculations, then the same trickle will take the form of fire tomorrow. It won’t take long.
In the past, the ratio of non-performing loans (NPL) in two large government-owned commercial banks, Nepal Bank Limited and Rashtriya Banijya Bank, reached over 60 per cent and the entire financial system was in a state of collapse.
The fact that the operation had to be done should not be forgotten under any circumstances. Apart from that, a similar reform program was conducted with the help of the Asian Development Bank (ADB) to improve the financial system of the Agricultural Development Bank and NIDC.
After the reform, RB Bank and NIDC merged. Despite this situation of government banks, it is not seen that the private sector banks remain problem-free. NRB epal Rastra Bank has had to intervene in the management of some commercial banks in the private sector.
The banking sector is the engine for economic growth through productive funds. Acts as a facilitator to achieve sustainable economic growth through the medium of efficient monetary policy
In the context of Nepal, NRB has classified loans into five categories based on the period of outstanding loans, namely standard, watch-list, sub-standard, doubtful, and loss, or bad loans.
In banking, a commercial loan is considered non-performing if the borrower has paid zero interest or principal within 90 days or less than 90 days.
IMF defines non-performing loans as: Borrowers have not paid interest or principal for at least 90 days or more interest payments have been delayed by capitalization, refinancing, or contracts for 90 days or more Payments have been delayed by less than 90 days, but with high uncertainty or comes with no certainty that the borrower will pay in the future.
Non-performing loans can damage a borrower’s credit rating, making it harder and more expensive to borrow money in the future. Nonperforming Loans (NPL) vs. Performing Loans (RPL) are defaulted loans.
The average NPL of commercial banks has increased to 2.29 percent in the first six months of the financial year 2022/23 compared to 1.06 percent in the same period of the financial year 2021/22.
In the first quarter of the current financial year, there has been a significant increase in the non-performing loans (NPL) of commercial banks. In the second quarter, the financial statements of 21 commercial banks showed that the banks’ bad loans increased by 116 percent.
The average NPL of commercial banks has increased to 2.29 percent in the first quarter of the financial year 2022/23 compared to 1.06 percent in the same period of the financial year 2021/22.
Bankers say that bad loans have increased mainly due to non-recovery of loans. Banks are struggling to recover loans while the private sector is struggling due to rising lending rates and a sharp drop in market demand.
NRB implemented guidelines on working capital loans at the end of October 2022 to prevent misuse of loans and to control the tendency of banks to pay interest by taking loans.
The non-performing loans of the banks have also increased because the businessmen and industrialists who took loans from the banks to pay the interest could not pay the interest after the implementation of the working capital loan guidelines.
As a large amount of money has to be set aside for the provision of bad loans, the increase in bad loans has also affected the profitability of the bank. Also, provisioning is a practice where banks keep a certain amount in reserve in case of non-repayment of loans.
Among the 21 commercial banks that released their second quarter report, Krishi Bikas Bank Limited has the highest NPL.
As compared to 2.08 per cent in the same period last year, the bank’s non-performing loans increased to 4.52 per cent at the end of January. During the review period, the government-owned bank succeeded in reducing bad loans by 9.67 per cent. Bad loans of not only commercial banks but also development banks have increased tremendously. According to the financial statements of the second quarter of the current financial year, their bad loans are increasing.
Bankers say that the increase in bad loans from development banks, which are playing an important role in rural development, is due to the recent increase in high-interest rates. Bankers say that when the interest rate is high and the economy slows down, there is a rush to collect loans because even small and medium entrepreneurs/businessmen have lost their jobs.
If we compare the current statement with the second quarter financial statement of the last financial year, it seems that bad loans of development banks have doubled. Such loans are called non-performing loans or bad loans. Any bank with more than 5 per cent bad loans is considered risky.
Bankers associated with development banks say that the contraction of the economy is the main factor behind the recent increase in bad loans from development banks.
Due to the contraction in economic activity, people’s cash flow has been affected, which has made it difficult for loan recovery. The purpose of a ‘Bad Bank’ is to manage the bad loans in banks by removing such loans from the bank’s balance sheet and trying to restore the financial health of the banks that have deteriorated due to bad loans.
Since “bad banks” manage their bad loans, there is a possibility that “good banks” may make unfair compromises concerning the quality of loans and projects due to the lure of profit.
In the end, because the mentality of buying bad loans is developed by ‘bad banks’, it cannot be said that the situation will not be created where other banks will always exploit artificial profits by showing them as ‘good’ until the state of their loans is completely ‘destroyed.
Also, it cannot be said that all bad loans managed by bad banks are recovered. Due to some unrecoverable loans, such a bank itself may fall into crisis.
Again, although the high margin rate has increased the profits of bad banks, it has had a sharp adverse effect on the profit rates of ‘good banks’ that sell bad loans. However, bad banks also have positive aspects. In 2078/79, this number increased more than three times to 13 thousand 239. This is a matter of concern.
As of January 9, 2079/80, the number of blacklisted persons has reached 13 thousand 201 in less than seven months. In this way, the number of blacklisted people has increased by nine times since the start of Corona. This number is expected to be historically high in this financial year.
The Credit Information Bureau has been put into operation since 2046 B.S. to prepare a list of those who embezzle loans, do not pay loans on time or commit other financial crimes and manage the risks of loans.
NRB has a provision that a person or organization can be blacklisted based on various circumstances. If the borrower goes missing or is not contacted for 90 days, if the loan principal or any instalment or interest payment date exceeds one year, the borrower is blacklisted.
Similarly, if money is cheated by using fake cheques, drafts, foreign currency, credit/debit cards, bills etc. issuers of checks without sufficient funds in their accounts are also blacklisted. It seems that this reason has also contributed to the increase in the number of blacklists.
At present, some banking institutions tend to give more loans only to big borrowers, because they do not classify the loans of big borrowers in the absence of debt recovery, and there is a tendency to increase the loan itself.
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