Non-performing loans prove crippling

Himalayan News Service

Kathmandu, June 3:

Non-performing loans of financial institutions have been crippling, experts and businessmen said here today. Various experts were speaking at a programme on ‘Non-performing Loan Reducing Strategy’, organised by the Independent Business News Pvt Ltd today. Bijay K C, Dean of Kathmandu University of Management (KUM), presenting a paper on the above mentioned theme said that non-performing loan is a big problem not only for financial institutions but also for borrowers as well. K C said that financial institutions should understand that business performance depends on many vagaries of business climate which are beyond the control of borrowers and that not all defaulters are wilful. Basu Dev Ram Joshi, president of Nepal Bankers Association (NBA) and chairman of Board of Directors of Rastriya Banijya Bank (RBB), said that all present RBB defaulters are ‘wilful defaulters’. Joshi also said that it is a difficult task to reduce banks’ non-performing loans. However, new management in the state-owned bank has been cautiously working to reduce NPA. He said that banks are custodian of public funds, so they need to work effectively. KC of KUM said that In 1993-94, loans and advances of financial institutions to the private sector was about 19.04 per cent of the GDP which increased consistently over the period of ten years and reached to 40.98 per cent in 2003-04.

Similarly, deposits collected by these institutions in 1993-94 accounted for about 27.30 per cent of GDP and this reached to almost 50 per cent in 2003-04, said KC. According to KC’s paper, commercial banks account for more than 80 per cent of the total deposits collected by all financial institutions and more than 70 per cent of total loans and advances to all financial institutions put together. Both deposits and loans and advances of financial institutions have increased by almost 300 per cent during the period between 1998 and 2004, indicating rising commercial bank lending over the period, according to KC’s paper. The amount of non-performing loan in financial institutions, as of July 2004, was Rs 29 billion and accounts for 23 per cent of total loans. On an overage, nonperforming loans accounted for about 29 per cent of the total loan during the last seven years.

The problem of non-performing loan is quite acute in Nepal Bank Ltd (NBL) and Rastriya

Banijya Bank (RBB). NBL and RBB combined share in the total loan portfolio of commercial banks was almost 56 per cent in 2000. Over the period, their share, however, has declined and reached to 34 per cent indicating tha these banks got more conservative in extending loans, says the report. According to KC’s paper, the causes of non-performing loan is moral hazard, lenient project appraisal, political favour and interest of vested groups. Not only that, banks’ policy to reward employees on the basis of loan target without considering the recovery aspect itself causes non-performing loan.

Diwakar Golchha, vice-president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI) showed concerns that the NPL in two largest banks - NBL and RBB - is serious. He said that due to inability to define wilful and non-wilful defaulters, investment climate in the country has deteriorated. Minister for finance Madhukar Rana; acting governor of Nepal Rastra Bank (NRB) Krishna Bahadur Manandhar; Prof Bishwambher Pyakuryal, president of Nepal Economic Association (NEA); Ajaya Ghimire, chairman of Ace Institute of Management; Rajendra Khetan, vice-president of Confederation of Nepalese Industries and Hridaya Raj Gautam, managing director of IBN Pvt Ltd were also present at the function.