The NRB increases provisions to protect banks from the surge in bad debts

According to Maha Prasad Adhikari, governor of Nepal Rastra Bank (NRB), the central bank has increased the provisioning amount against bad loans to protect banks from potential financial risks without influencing their propensity to pay dividends to shareholders.

Currently, several bankers have been blaming the central bank’s unfavorable policies for their incapacity to deliver substantial returns to their shareholders in an effort to save face. To elucidate the central bank’s stance on the issue, NRB Governor Adhikari shared his thoughts in this respect.

I’ve heard that banks aren’t able to pay dividends to their shareholders because of the NRB’s current provisioning rule. However, the goal of the policy is to protect banks from the current unfavorable circumstances, not to cut their earnings,” Adhikari stated during the Nepal Bankers’ Association (NBA) annual general meeting on Thursday.

Two of the twelve commercial banks that have declared dividends for this year are not giving their shareholders any payouts. Only one of the nine, Standard Chartered Bank, has raised its dividend ratio to 25.5%; the other banks have announced dividend ratios that are lower than those they distributed during the previous fiscal year. Over the last five years, Nabil Bank’s dividends have decreased from 35.26 percent to merely 10 percent.

The NRB reports that banks’ non-performing loan (NPL) ratio increased to 3.8 percent in mid-July 2024, causing their loan-loss provisions to rise by 29.5 percent. In the previous fiscal year, this resulted in an 8.8% decrease in net earnings. By mid-October of this year, banks’ non-performing loans (NPLs) had risen to 4.42 percent.

The sum that banks and other financial institutions set aside to cover any losses resulting from non-performing loans is known as the loan loss provision. For bad loans, banks currently have to retain 25 percent and 1.1 percent in loan-loss provisions. Similarly, it is 50% for loans that are questionable and 100% for problematic loans that are past due for more than a year.

According to NRB Governor Adhikari, banks are currently having difficulty collecting billions of rupees in past-due amounts, even from performing assets. “Provisioning has produced a favorable outcome in this case,” he continued.

Santosh Koirala, the newly appointed president of the NBA, echoed Adhikari. According to Koirala, “banks are now having difficulty recovering their credits, which has increased their risk of facing increasing bad debts in the future.” He also mentioned that banks have accumulated non-banking assets that they are unable to sell on the market.

The NRB’s policy of prohibiting banks from issuing shares and preventing bank promoters from selling their shares was questioned by former banker Rajan Singh Bhandari. “The central bank must also implement a policy that keeps bankers and businesspeople apart and makes it easier for those who wish to leave the banking sector to do so,” Bhandari stated.