KATHMANDU, JUNE 22

The slowdown in the economy both globally and locally over the past couple of years has affected the operation and monitoring standards of banking institutions, expanding the credit risk situation.

According to the Bank Supervision Report 2021-22 released by the Nepal Rastra Bank (NRB)'s Bank Supervision Department on Wednesday, excessive lending, especially to non-productive sectors, slowdown of economic activities post COVID- 19, the slowdown in the construction sector, over-financing and use of loans for other than the intended purpose, increment in interest rate have reduced the repayment capacity of the borrower, thereby resulting in rising non-performing loan (NPL) level.

Although loans disbursed were not found to be used for the intended purpose, they had been classified as pass category which is non-compliance of NRB Unified Directives. As per the report, new loans were disbursed to settle existing demand loans/term loans/forced loans, settlement of interest at quarter-end, transferred to the account of sister concern without business transaction, and used to settle loan of sister concern in another bank, adding to the credit risk situation.

As a high number of loans taken by the private sector are from banking institutions, there is a probability of increasing credit risks in the sector, NRB Spokesperson Gunakar Bhatta shared. 'While the credit-to-GDP ratio in other countries in South Asia is around 60 percent, the ratio stands at around 90 percent in the country as per the data unveiled by the National Statistics Office in May. However, it is common to see the issues mentioned by the report in the banking sector. The operating standards of the banking sector have been affected as a result of the economic slowdown following the spread of COVID-19 and other global effects. During COVID-19, monitoring by the banks was affected, leading to loans being used for other purposes than intended. Following the slowdown in the economy over the past few years, NPLs have also increased which has added to the issues related to credit risks,' Bhatta said, adding that the situation will improve alongside some progress seen in economic activities.

According to the third quarterly report published by the Nepal Bankers' Association (NBA) in May 2023, the number of NPLs increased by 3.03 percent in the first nine months of the current fiscal year (mid-July to mid-April) compared to 1.27 percent over the same period of the last fiscal year.

Meanwhile, Sunil KC, president of NBA, also reiterated that the increase in NPLs and the challenging economic environment at present has added to the risk factor.

'The economic situation has been very challenging in the last three years for the country as a whole. As a result, we witnessed fewer new investments in the private sector, low credit growth, and a rise in inflation. There was also additional pressure on the monetary as well as the fiscal and liquidity situation, which further impacted the situation and could have added to the existing risks,' KC shared. 'However some positive indications seen in the economy over the past six months in terms of increase in remittance flow, stabilising imports, the surplus situation of country's balance of payment, increase in foreign exchange reserves, positive liquidity situation, among other factors, are expected to ease the situation and gradually reduce the risks in the sector,' KC said.

Meanwhile, Bhatta shared that the NRB has implemented four types of supervision methods and that the central bank is actively working to improve and manage the banking sector, adding that the central bank has taken action against banks that have not complied with the regulations.

'From a broader macroeconomic perspective, the private sector remains very much liberated and we are gradually trying to manage it. However, it is also important for the private sector as well as normal citizens to use the disbursed loans for the intended purpose only,' Bhatta said.

A version of this article appears in the print on June 23, 2023, of The Himalayan Times.