Commercial Banks' Non-Performing Loan (NPL) Ratio: Rising Challenges and Future Directions
Author
NEPSE trading
The Non-Performing Loan (NPL) ratios of Nepal's commercial banks for FY 2080 Poush reveal a concerning rise, signaling growing challenges in loan recovery. According to the data, the average NPL ratio increased by 1.09 percentage points, climbing from 3.40% in FY 2079 Poush to 4.49% in FY 2080 Poush. This surge indicates a need for immediate attention to credit risk management across the banking sector.
While most banks recorded an increase in NPL ratios, only two banks—Everest Bank and Standard Chartered Bank—managed to reduce their NPL levels. The trend highlights the urgent need for strategic interventions to address loan recovery issues.
Bank | 2079 Poush (NPL) | 2080 Poush (NPL) | Difference (∆) |
|---|---|---|---|
Kumari | 4.97% | 6.96% | +1.99% |
Nepal Investment Mega | 4.58% | 5.86% | +1.28% |
Laxmi Sunrise | 4.56% | 5.67% | +1.11% |
Prabhu | 4.05% | 5.06% | +1.01% |
Nepal Bank | 4.99% | 4.99% | 0.00% |
Himalayan | 4.39% | 4.98% | +0.59% |
Prime Commercial | 4.96% | 4.96% | 0.00% |
Rastriya Banijya | 4.96% | 4.96% | 0.00% |
Nabil | 4.32% | 4.93% | +0.61% |
Agriculture Development | 3.02% | 4.90% | +1.88% |
Global IME | 4.24% | 4.89% | +0.65% |
Citizens | 3.54% | 4.60% | +1.06% |
NIC Asia | 1.19% | 4.61% | +3.42% |
Machhapuchchhre | 3.45% | 3.55% | +0.10% |
Siddhartha | 2.45% | 2.56% | +0.11% |
NMB | 3.65% | 3.65% | 0.00% |
Nepal SBI | 2.55% | 2.56% | +0.01% |
Sanima | 1.22% | 1.92% | +0.70% |
Standard Chartered | 1.77% | 1.66% | -0.11% |
Everest | 0.77% | 0.66% | -0.11% |
Average (All Banks) | 3.40% | 4.49% | +1.09% |
1. Banks with the Highest NPL Ratios
Kumari Bank reported the highest NPL ratio at 6.96%, an increase of 1.99 percentage points from the previous year.
Other banks exceeding the critical 5% threshold include:
Nepal Investment Mega Bank: 5.86%
Laxmi Sunrise Bank: 5.67%
Prabhu Bank: 5.06%
These banks now face limitations imposed by Nepal Rastra Bank (NRB), which prohibits banks with NPLs above 5% from distributing dividends or expanding their business.
2. Banks with the Most Significant NPL Increase
NIC Asia Bank experienced the largest rise in NPL ratio, increasing by 3.42 percentage points to 4.61%. This sharp rise reflects challenges in loan recovery and higher credit risks.
Agriculture Development Bank recorded the second-largest increase of 1.88 percentage points, reaching 4.90%.
3. Banks Reducing NPL Ratios
Everest Bank and Standard Chartered Bank were the only banks to reduce their NPL ratios:
Everest Bank: Reduced from 0.77% to 0.66% (-0.11%).
Standard Chartered: Reduced from 1.77% to 1.66% (-0.11%).
These improvements reflect better credit risk management and focused loan recovery efforts.
4. Industry Average
The average NPL ratio increased from 3.40% in FY 2079 Poush to 4.49% in FY 2080 Poush, indicating a worsening trend across the sector.
Factors Behind the Increase in NPL Ratios
Loan Recovery Challenges
Borrowers have faced difficulties in repaying loans due to economic uncertainties and business disruptions.
Economic Slowdown
The overall economic slowdown has led to reduced revenues for businesses, making it harder for them to meet repayment obligations.
High-Interest Rates
Rising interest rates have increased the financial burden on borrowers, especially small and medium enterprises (SMEs).
Inadequate Credit Monitoring
Some banks failed to implement rigorous monitoring of loan portfolios, resulting in delayed identification of repayment risks.
Implications of High NPL Ratios
Impact on Financial Health
High NPLs weaken a bank's financial stability, as provisions for bad loans reduce profitability.
Regulatory Restrictions
As per NRB regulations, banks with NPLs exceeding 5% cannot:
Distribute dividends to shareholders.
Expand their loan portfolios or undertake new business ventures.
These restrictions aim to push banks toward improving loan recovery efforts.
Future Risks
Persistent increases in NPL ratios could lead to reduced investor confidence and a tightening of credit availability in the market.
Recommendations for Banks
Strengthen Loan Recovery Processes
Banks must focus on recovering bad loans by allocating resources to debt collection and negotiating with defaulters.
Improve Risk Management Practices
Implement robust credit evaluation systems to identify high-risk borrowers before loan approval.
Monitor Loan Portfolios Regularly
Conduct frequent reviews of loan portfolios to detect early signs of repayment challenges and take corrective actions.
Diversify Loan Portfolios
Reduce dependency on a few high-risk sectors by diversifying loans across different industries.
The rising NPL ratios highlight the critical need for banks to enhance their credit risk management and focus on loan recovery. The challenges faced by the banking sector are an opportunity to implement stronger internal controls and adopt more effective lending practices.
Banks that can successfully address their NPL issues will not only stabilize their financial performance but also contribute to the long-term resilience of Nepal's banking system.
