KATHMANDU: The bad debts of banks and financial institutions (BFIs) have surged to a 10-year peak of 3.98 percent, largely attributed to the economic slowdown following the COVID-19 pandemic.

A recent report prepared by Nepal Rastra Bank (NRB) indicates that the proportion of bad debt in BFIs was 3.76 percent a decade ago. This figure had decreased significantly to 1.31 percent by June 2022.

However, as of mid-April this year, the bad loans of commercial banks have risen to 3.89 percent. Meanwhile, development banks and finance companies have recorded non-performing loans of 3.63 percent and 10.40 percent, respectively.

The number of cases at the Debt Recovery Tribunal formed to recover bad loans of banks and financial institutions has more than doubled this year.

With banks encountering difficulties in loan recovery amidst a decline in economic activities, the number of cases filed with the tribunal has also begun to rise.

Banks can register a case at the tribunal if they are unable to recover the loan even from the mortgage auction. Information officer of the tribunal, Devendra Dhakal, said that the number of cases has increased as there is no condition to recover the loan from the mortgage due to the fall in real estate prices along with the economic slowdown.

As of mid-March of the current fiscal year (FY), banks and financial institutions have registered 342 cases at the tribunal. During the corresponding period last year, only 162 cases were registered. It shows that the number of cases has doubled this year. A total of 200 cases were registered at the tribunal last year.

The central bank had earlier warned that credit risk is on the rise within commercial banks due to loans being issued without the completion of requisite procedures. Increasing bad loans of banks and financial institutions also indicate the rise in credit risk, the NRB said following a supervision of banks.

According to the supervision report published by NRB in April, during the monitoring, some banks were found to have provided more loans than necessary without adequately assessing the needs of the borrowers. The central bank has stated that loans are given without maintaining a balance between the customer's assets and loan ratio. It also noted that the monitoring system after loan disbursement is weak.

Similarly, the NRB study found that banks have given new loans to pay off old loans.

According to Nepal Rastra Bank sources, the quality of banking service is deteriorating due to the competition among banks to extend loans after the Covid- 19 pandemic.

"Banks are under pressure to increase their profits by increasing their loans," said an executive director of Nepal Rastra Bank on condition of anonymity.