BFIs unlikely to post impressive results in Q1
Kathmandu, October 12
The first quarter results of banks and financial institutions (BFIs) are not expected to be impressive this fiscal year, as protests in the Tarai and supply disruption are expected to reduce interest income in the banking sector.
Many industrialists, traders and entrepreneurs have already told bankers they would not be able to service the debt on time this quarter, citing huge revenue loss due to agitation called by Madhesi parties and irregular flow of raw materials and petroleum products from India.
“Lately, even borrowers who have acquired consumer loans (such as home and auto loans) have started saying they are not in a position to pay equated monthly instalments,” said Sanima Bank CEO Bhuvan Kumar Dahal.
These reactions show interest income of BFIs are likely to take a hit, because BFIs will have to continue paying depositors even if borrowers fail to make payments on time.
“So, borrowers’ inability to service the debt will ultimately put pressure on profits of BFIs in the first quarter (ending October 17),” Dahal said.
Like almost every sector, protests in the Tarai and supply disruptions have hit the banking sector, which was beginning to make a recovery following devastating earthquakes of April and May.
Lately, issuance of letters of credit (LCs), for instance, has plunged because most of the Nepal-bound goods are either stuck at the port in Kolkata, the Inland Clearance Depot in Birgunj or various Nepal-India border points. Banks that are still providing trade financing facility are doing so on condition that ‘shipments be made only after getting confirmation from the bank that issues LC’.
This drastic reduction in issuance of LCs during Dashain — when demand for credit related to trade financing jumps to import goods required for the festive season — has reduced cash flow of banks.
“This will affect our income, as almost 35 per cent of the loans related to trade financing are issued in the first quarter, when Dashain festival generally falls,” Dahal said.
This implies prolonged protests in the Tarai and disruption in supply situation will only cause more damage to the banking sector.
The protests in the Tarai began around 61 days ago demanding inclusion of a number of provisions in the constitution that was being drafted.
These agitations initially affected movement of vehicles in the Tarai — which borders India — preventing manufacturing firms from sending finished goods to the market or fetching raw materials from India, the supplier of most of the goods for Nepal.
The situation, however, became worse after the new constitution was promulgated on September 20.
Although Nepal’s new charter — endorsed by almost 85 per cent of the people’s representatives at the Constituent Assembly — was welcomed by many in the country and abroad, some Madhesh-based political parties and groups are not happy with it.
Just then, supply of various commodities from India, especially petroleum products, suddenly fell, creating fuel shortage in the country. The shortage has now turned into a full-blown fuel crisis, affecting each and every sector of the economy.
Although fuel supply from India has increased in the last two days, it will still take several days for the situation to normalise, as most of the tanks of vehicles and generators that provide power to different industries during loadshedding hours are empty.
This means factories in industrial belts of Hetauda, Birgunj-Pathlaiya, Sunsari-Morang and Lumbini; hotels, which are reporting average room occupancy rate of 25 to 35 per cent in the peak tourist season; hospitals that are facing shortage of life-saving drugs and oxygen; agriculture sector, which is dealing with short supply of fertilisers and feeds; and construction sector which needs diesel to run various machinery, will continue to suffer in the coming days as well.
To provide lifeline to borrowers and aid BFIs, Nepal Rastra Bank, the central bank, is soon coming up with a relief package, which will include debt restructuring facility, deferment in credit payback period and grace period for loan repayment.
The package will also allow BFIs to circumvent the mandatory requirement on loan loss provisioning if borrowers, whose revenue flow has been affected by protests and supply disruption, are unable to pay the dues on time. Also, the package will enable BFIs to classify debt, whose regular payments have not been made, as good loans.
“These provisions will prevent the level of non-performing loans from jumping suddenly and allocation of funds for provisioning. However, these facilities won’t be able to offset the interest income that we have lost, which will hit profits,” Dahal said. And this may even cause share prices of some banking institutions to drop.