Banks under pressure ahead of mid-January deadline: Loan recovery falls short despite regulatory relief

KATHMANDU: Banks and financial institutions are under mounting pressure ahead of the mid-January deadline as they rush to improve second-quarter financial statements, but loan recovery has failed to meet expectations, according to sources familiar with the sector.

Since the beginning of January, banks have intensified efforts to recover outstanding loans in order to strengthen their balance sheets. With new lending opportunities limited, financial institutions have shifted focus from credit expansion to collecting old loans to present stronger second-quarter results.

Despite monthly imports exceeding NPR 150 billion, demand for credit in productive sectors such as industry and trade has remained weak. Sources say banks, unable to deploy fresh capital, are prioritizing recovery of existing loans rather than extending new financing.

However, loan recovery has not shown a meaningful turnaround. According to banking sector sources, collections have improved marginally compared to the previous quarter, but not to a level that would significantly ease pressure on balance sheets. The slowdown comes after banks’ profits contracted by nearly 19 percent in the first quarter of the current fiscal year.

Traditionally, loan recovery improves in the second quarter compared to the first. This year, banks have also benefited from regulatory relief provided by the central bank, which allowed restructuring and rescheduling of loans for borrowers affected by extraordinary disruptions, upon request, until mid-January. This facility has provided temporary breathing space for both borrowers and lenders.

Sources indicate that effective management of non-performing loans helps contain provisioning requirements, which in turn supports profitability. While recovery of some large loans has resumed, bankers describe the overall pace as neither weak nor encouraging.

Excess liquidity has continued to build in the banking system due to slow investment activity and rising remittance inflows. As a result, lending rates have dropped below 7.5 percent. Even so, demand for new loans remains sluggish.

In the first five and a half months of the current fiscal year, commercial banks have extended only about NPR 76 billion in new credit, significantly lower than NPR 127 billion recorded during the same period last year. Although lower interest rates were expected to improve borrowers’ repayment capacity, sources say this has not translated into a substantial rise in loan recovery.

Loan collection has also been affected by growing resistance during recovery efforts. According to sources, incidents involving threats and physical assaults against bank staff by borrowers or their associates have disrupted recovery processes. Concerns over staff safety have further complicated collections.

When recovery efforts fail, banks are compelled to initiate collateral auction procedures. However, sources note that weak economic activity has made it difficult to sell auctioned assets, prolonging recovery cycles. Without a broader economic pickup, a sharp improvement in loan recovery appears unlikely.

Despite underwhelming recovery performance, regulatory forbearance is expected to provide limited relief to bank profitability in the second quarter. Sources say loan restructuring facilities for affected businesses have eased pressure on non-performing loan management, helping prevent severe deterioration in balance sheets.

Additional regulatory measures have also supported banks. Loans that return to regular status after auction proceedings have begun are no longer required to be mandatorily classified as bad loans. Furthermore, the removal of the requirement to immediately book 100 percent losses on acquired non-banking assets has helped banks manage balance-sheet stress.

Overall, while banks remain under intense pressure as the reporting deadline approaches, sources say loan recovery is unlikely to improve significantly unless the broader economy regains momentum.