Risky loans on rise

Coupled with increased lending portfolio, risky loans of domestic banks have also gone up overshadowing profits, according to their financial reports.

With Non-Performing Assets (NPA), loan loss provisioning has shot up eclipsing profits, reveal the unaudited reports of 14 commercial banks published till date.

Nabil Bank -- one of the largest banks that provisioned Rs 45 million in 2008-09 -- provisioned over eight times to Rs 345.98 million in 2009-10. Likewise, Standard Chartered Bank Nepal Ltd -- another bank’s provisioning went up by Rs 200 million by end of 2009-10. “Out of 14 commercial banks, seven banks’ loan loss provisioning have gone up,” according to the report.

“A bank making a small number of risky loans will have a low loan loss provision compared to a bank taking higher risks,” said market analyst Rabindra Bhattarai. “Exposure to risky loans hurts shareholders,” he said, adding, “Had their loan loss provisioning not increased, shareholders would have got more dividends as the banks have posted more profits compared to the previous fiscal.” Provisioning guarantees a bank’s solvency and capitalisation, if and when the defaults occurs, he said, adding that the loan loss provision allocated each year increases with the riskiness of loans a bank floats.

President of Nepal Bankers Association (NBA) Sashin Joshi thinks this could be only the tip of the iceberg. “It could be the outcome of the difficult phase we went through last year,” he said, adding that full impact of asset price correction was yet to be seen.

According to the central bank’s directive, a bank has to provision one per cent as soon as it lends. Similarly, after six months, the loan is dubbed sub-standard and the bank has to provision 25 per cent. If the principle and interest is not paid till one year, it is considered a doubtful loan and 50 per cent of the total loan has to be provisioned. If borrowers don’t pay after one year, it is considered a bad loan and 100 per cent of the loan has to be provisioned. Sub-standard, doubtful and bad loans are calculated in the NPA.

The good loan is not calculated in NPA. But sub-standard, doubtful and bad loans are calculated in the NPA. The largest NPA is registered by Rastriya Banijya Bank that has been reduced to 9.81 per cent from 15.64 per cent a fiscal year ago. RBB has posted Rs 2.01 billion. Among the private commercial banks, Nepal Investment bank Ltd has registered the highest profit of Rs 1.26 billion in 2009-10.