Economy and Business

Nepal's commercial banks reduce bad debt ratio by 3.34% in last fiscal quarter


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KATHMANDU: During the final three months of the fiscal year 2023-2024, Nepal's commercial banks' bad debt ratio fell from 3.89 percent to 3.76 percent. This progress is being driven by banks' present focus on resolving Non-Performing Loans (NPLs) rather than generating new ones. Debtors were asked to repay their loans by the end of the fiscal year, which boosted the recovery effort. Despite the economic crisis and difficulties with loan recovery earlier this year, banks were able to reduce their bad debt percentages.


The non-performing loan ratio started to decline after a period of significant rise, peaking at 3.89 percent by mid-July 2023. In mid-January 2023, the bad debt ratio stood at 2.63 percent; by the third quarter of the fiscal year, it had risen to 3.89 percent. The Nepal Rastra Bank (NRB) categorization scheme for non-performing loans (NPLs) requires different levels of provisioning for substandard, dubious, and problematic loans. The reduction in bad debts was also aided by the NRB's flexible monetary policy, which allowed for longer loan payback terms and the occasional relaxation of borrower blacklisting.


The bad debt ratios of financing firms and development banks improved as well. Throughout the assessment period, development banks had a decline in bad debt from 3.63 percent to 3.62 percent, and financing firms saw a decrease from 10.40 percent to 9.87 percent. Despite persistent difficulties, this indicates a more general upward trend in the banking industry.


Additionally, commercial banks have improved their capital adequacy ratios, which is essential to their capacity to extend credit. The 2015 Capital Adequacy Framework of the NRB mandates that banks have a capital adequacy ratio (CAR) of 11.5 percent. Right now, requirement Chartered Bank has the highest CAR of 17.16 percent among the 20 commercial banks that meet this requirement, and NIC Asia Bank has the lowest CAR of 11.18 percent. This rise in capital sufficiency has put banks in a stronger position to expand their lending activities moving forward.