Bad loans eat into banks’ profits

As the realty sector is sailing on the difficult waters the Non Performing Assets (NPA) of the commercial banks have gone up in the first quarter of the current fiscal year.
The amount of NPA has reached 2.4 per cent on first quarter which stood at 1.84 per cent in the corresponding quarter last fiscal year, according to the unaudited financial data of 17 commercial banks that have published their financial for the first quarter of the current fiscal year.
Among 17 commercial banks, Agriculture Development Bank ltd (ADBL) owns the highest amount of NPAs of 11.05 per cent while Everest Bank Ltd (EBL) has the lowest.
The NPA of banks reflect the amount of loans that have gone sour. It is a loan that the financial institutions have been unable to recover from the customer within stipulated time, especially those exceeding 90 days of the predetermined period. The NPAs are one of the key indicators that gauge the financial strength of any financial institution as higher NPA reflects vulnerability of the financial institutions.
The commercial banks have about Rs 150 billion worth loans floated to realty sector — including real estate and housing projects — that is 21 per cent of total lending portfolio, though the central bank suspects more lending in the sector.Since sometime back the real estate sector has cooled down leading to more bad loans. The sector has been pressuring the central bank and the banks as they have not been able to serve interest in time due to slackening business lately.
Nepal Rastra Bank (NRB) recently has also extended the outstanding interest payment for one more months after the end of first quarter to aid the interest payment to the financial institutions.
"NRB's decision to include the interest income by mid-November instead by mid-October will help the banks to reduce NPLs and also give relief to the borrowers - especially the realty sector," according to spokesperson for the central bank Bhaskar Mani Gyanwali.
"NPL can be expected to decline as the rest of the banks might be waiting to revise the balance sheet including the interest payment made by mid-November," he added.But, the housing developers are not confident that the move is going to aid them as it came too late to rescue them from managing the finances to pay the outstanding dues.
The NPA, also known as, Non Performing Loans (NPL) is a dead liability that does not yield any income to the banks in the form of principal and interest payments rather eats into their profit as the banks need to provision certain portion of their profit to balance the assets that might go bad in the future so that higher NPAs leading to the lower profit. The first quarter profits of the commercial banks revealed that the profit has come down compared to the same quarter in the last fiscal year.
However, an interesting trend has been also revealed in the balance sheets. Despite the rising NPA, loan loss provisioning has gone down, instead of increasing with NPA. The 17 commercial banks have provisioned Rs 50 billion to cover the loss arising from possibility of loans going bad in the first quarter while in the same perios of last fiscal year these banks had provisioned Rs 82 billion.