NRB raises NPA limit for deposits to 8pc amid rising bad loans

KATHMANDU: The Nepal Rastra Bank (NRB) has increased the limit for Non-Performing Loan (NPL) ratios from 5% to 8% for deposits placed in banks and financial institutions. This decision comes after many banks struggled to keep their bad loans below the previous threshold of 5% due to challenges in loan recovery.

On Sunday, the central bank announced that it would invest NPR 4 billion 79 lakh in time deposits across commercial banks, development banks, and finance companies.

Specifically:

NPR 3.2065 billion will be deposited in commercial banks,
NPR 60.11 crore in development banks, and
NPR 20.03 crore in finance companies.

The new condition requires banks to maintain an NPL ratio of 8% and a self-NPL ratio of 3% . Previously, only banks with NPLs below 5% were eligible for NRB deposits. However, as bad loans surged beyond 5% for many banks due to difficulties in loan recovery, the central bank revised its criteria to allow investments in institutions with NPLs up to 8%.

Other Institutions Follow Suit

Besides the central bank, various government and non-government entities also invest in bank deposits. Traditionally, these institutions have required banks to maintain an NPL ratio below 5%. As a result, banks exceeding this threshold were excluded from such investments.

However, some non-banking institutions have already adjusted their policies. For instance, certain insurance companies and funds have raised their NPL thresholds or temporarily waived them to continue investing in banks.

“Most government institutions and insurance companies still impose a 5% NPL limit. Consequently, banks with higher bad loans are unable to attract deposits,” said a banker. “But given the current economic situation, many institutions understand the need for flexibility. Some have internally revised their policies to align with the new reality.”

Social Security Fund Adjusts Policy

The Social Security Fund had already decided several months ago to invest in deposits without strictly adhering to the 5% NPL limit. Now, institutions maintaining stricter criteria may face pressure to follow the central bank’s lead.

“There is no formal directive from the central bank mandating a specific NPL threshold for deposit investments,” explained a banker. “Historically, 5% has been considered the average acceptable limit, so institutions adopted that standard. Since the central bank itself has now raised the limit to 8%, other entities are likely to follow suit.”

Economic Context and Liquidity Situation

The broader economic context justifies the relaxation of the NPL threshold. With the economy remaining fragile, accepting an NPL ratio of up to 8% is seen as reasonable. Insurance companies and other institutional investors are expected to align with the central bank’s revised policy.

“Currently, the banking system has sufficient liquidity, so the impact of raising the NPL threshold is minimal,” noted a banker. “The credit-to-deposit (CD) ratio is around 70-80%, indicating ample liquidity. Unlike in the past, when deposit shortages caused significant problems, banks now have adequate resources and are not aggressively seeking institutional deposits.”

Relief for Banks
This move by the central bank will provide relief to banks with NPLs hovering around or slightly above the 5% mark. According to recent data, banks such as Kumari Bank, AIMB, Laxmi Sunarize, Prabhu Bank, Himalayan Bank, Nepal Bank, Prime Commercial Bank, Nabil Bank, and Agricultural Development Bank stand to benefit significantly from the revised policy.

Key Points:

NPL Threshold Raised: From 5% to 8% for deposits in banks and financial institutions.
Central Bank Investment: NRB to invest NPR 4.079 billion in time deposits across banks.
Conditions: NPL ratio must not exceed 8%, and self-NPL ratio must remain below 3%.
Impact on Banks: Banks with NPLs near or slightly above 5% will benefit, including Kumari Bank, NIMB, and others.
Liquidity Status: Current CD ratio at 70-80%, indicating sufficient liquidity in the banking system.