October 8: The net profit of banks and financial institutions (BFIs) is projected to increase by around Rs 2.5 billion in the Nepali month of Asoj (mid-September to mid-October).

After Nepal Rastra Bank (NRB) announced to give concessions on the credit loss risk ratio, the amount that banks have to set aside for credit risk from their profit will decrease and the profit will increase.

As per the instructions issued by the central bank on Thursday, it is enough for banks to arrange only 1.25 percent credit risk on good loans. After the outbreak of the Covid-19 pandemic, the NRB had instructed banks to set aside 1.30 percent of their profit for credit risk on good loans. Prior to that, there was a provision to set aside only 1 percent for credit risk on good loans.

According to the data of Nepal Rastra Bank, commercial banks, development banks and finance companies have extended a total of Rs Rs 4860.84 billion credit as of mid-August. Banks have set aside a total of Rs 169.10 billion for risk of this type of loan.

Now, if the amount to be set aside for risk on good loans is reduced by 0.05 percentage points, around Rs 2.43 billion will be added to the profit of banks from the risk fund.

However, due to arrangements for micro-monitoring, sub-standard, doubtful and bad loan risk, there will be some reduction in the aforementioned amount. There is a provision that banks should set aside 5% for micro-monitoring loans, 25% for sub-standard loans, 50% for doubtful loans and 100% for bad loans. According to the provisions of the integrated directive, loans that are overdue for 3 months to 6 months are classified as sub-standard loans, loans that are overdue for 6 months to at most one year as doubtful loans, and loans that are overdue for more than one year are classified as bad loans.

Bad loans of banks are increasing due to the slump in economic activities. In this situation, the banks have been a relief by the NRB’s decision to give concessions in the credit loss risk.