KATHMANDU: Nepal Rastra Bank (NRB) has reduced the amount that banks and financial institutions must set aside for loan loss provisioning, providing relief to the banking sector. In the third quarterly review of the monetary policy for the current financial year (FY 2080/81) in the third week of May, the central bank announced that banks could reduce provisioning for loans classified in the good category from 1.25 percent to 1.20 percent. By the fourth week, NRB issued instructions to implement the new provisioning. Consequently, the overall provisioning amount of banks has decreased.

According to the NRB, banks and financial institutions had set aside a total of Rs 77.79 billion for provisioning as of mid-June of the current year. This figure represents a 0.91 percent decrease compared to Rs 78.50 billion set aside until mid-May.

Due to the slowdown in economic activities, bad loans have increased as banks have struggled to recover the loans. Banks have been demanding concessions in provisioning due to the rise in bad loans. Before the Covid-19 pandemic, only 1 percent provisioning was required for good loans. This rate was increased to 1.30 percent during the pandemic but was reduced to 1.25 percent last year and further decreased to 1.20 percent in May of this year.

Sunil KC, President of the Nepal Bankers Association, stated that the central bank had increased provisioning due to the heightened risk during the Covid-19 pandemic and that they had been suggesting a return to previous levels. Banks and financial institutions now have to set aside 1.20 percent of the loan amount for provisioning as soon as they disburse loans.

Additionally, if a loan is overdue for more than one month, banks must set aside 5 percent of the loan amount for provisioning. The central bank has mandated 25 percent provisioning for loans overdue for 3 to 6 months, 50 percent provisioning for loans overdue for 6 months to one year, and 100 percent provisioning for loans overdue for more than one year.

According to Nepal Rastra Bank, banks and financial institutions earned a net profit of Rs 61.95 billion by mid-June of this year. During this period, commercial banks made a net profit of Rs 56.45 billion, development banks Rs 4.95 billion, and finance companies Rs 540 million. Compared to last year, the profit of banks is 16 percent lower this year.

Banks have been unable to extend credit flow in proportion to the increase in deposits, affecting their income. The rise in bad loans has also impacted banks’ profits. Due to non-recovery of loans, the distributable profit of 10 commercial banks was negative in the third quarter of the current year.