First Business News Portal in English from Nepal
KATHMANDU: In response to the growing issue of loan defaulting and the subsequent surge in bad debts faced by banks, Nepal Rastra Bank (NRB) has shown its willingness to be more flexible.
The central bank is now considering loan restructuring for business entities, aiming to tackle the rising cases of non-performing loans (NPL) that are reaching approximately five percent and are likely to escalate further.
Officials from NRB have expressed concern over the impact of increasing NPL on the banking sector’s performance. The current average NPL of banks stands at 3.03 percent, with Himalayan Bank Limited having the largest NPL at 4.56 percent.
The rise in NPL necessitates an increase in risk weightage, which can put significant pressure on the banks’ capital adequacy in the long run.
To address these challenges and ensure a safe landing for the financial sector, the central bank is proactively searching for effective credit management measures.
With liquidity surging in the banks, there has been a simultaneous increase in bad debts, likely a result of the ongoing economic slowdown in the country.
In light of these circumstances, NRB has taken a progressive step by permitting banks to extend new loans to debtors. The objective is to help debtors settle their old loans and alleviate the burden of bad debts.
This move comes as the central bank faces mounting pressure from the International Monetary Fund (IMF) and strives to improve the overall financial sector performance.
The IMF has expressed concerns over the alarming NPL levels in Nepali banks and warned about the potential risks associated with such a trend.
According to an IMF study report, if the NPL trend persists, Nepal could see up to 92 percent of ‘credit greenery,’ a situation that could severely impact the country’s financial stability.
Previously, NRB had capped working capital loans to entrepreneurs in response to credit greenery concerns.
However, following demands from the business community, the central bank has now adopted a more flexible stance by allowing for the refinancing and rescheduling of loans.
This decision marks a notable shift in NRB’s approach, demonstrating its commitment to find practical solutions to the challenges faced by both banks and businesses.
By supporting debtors in managing their outstanding loans, the central bank aims to foster a healthier financial ecosystem in Nepal.
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