Permanent Link: NeBEU Sandesh 2082 Baishakh - NeBEU
Financial indicators of the banks
and financial institutions have been impacted by the slowdown in economic
activities in the post-COVID period, amid difficult global as well as domestic
economic conditions. On the global scale, geopolitical tensions have impacted
global economic and financial conditions while slowdown in economic activities
in the domestic economy has resulted in constrained borrower capacity to repay,
reduced demand for credit and higher default rate. As a consequence of this, non-performing
loan of the banks has increased with a subsequent increase in Non-banking Assets
(NBA) and decline in profitability. This article discusses the recent trend of
major financial indicators of the commercial banks in the context of rising
concerns about their financial soundness indicators.
1. Deposit, Lending and Interest Rate
While
deposits have increased due to the inflow of remittances, credit growth has
been slow during the last one and half year. Average credit growth during the
last two years has been around 6 percent while monetary policy had projected a
credit growth of around 12 percent. Sluggish economic activities and the resultant
decline in credit demand has been the major cause for the moderation in credit
growth. During the first nine months of the current fiscal year (FY 2081/82), deposits
of the commercial banks increased by Rs. 366 billion (6.36 percent) while total
loans and advances increased by Rs. 344 billion (7.53 percent). In terms of sectors, growth rate of loans
disbursed to Agriculture, Forestry and Beverage, Power, Gas and water, and
Finance, Insurance and real estate has been higher compared to other sectors.
In terms of volume, consumption loan, loans disbursed to wholesale and retail
trade and loans disbursed to power, gas and water sector has increased by more
than Rs. 45 billion during this period.
Interest
rate has been gradually declining from the last one and half year. Average
lending rate of the commercial banks has declined from 13.03 percent in Falgun
2080 to 8.11 percent in Baishakh 2082. Base rate of the banks has also declined
from 11 percent to 6.17 percent during the period.
Non-performing
loan (NPL) is gradually increasing, raising concerns for financial stability.
Average NPL of the commercial banks reached 5.05 percent as of Chaitra 2081
from 3.89 percent a year ago. Such ratio was 3.76 percent in Asar 2081. Even
though the level of NPL is not worrisome compared to many developing countries,
its persistent increase is a concern for safeguarding financial stability.
One of the major reasons
for the increasing NPL is the slowdown in economic activities during the post
COVID period. Contraction in economic activities in the sectors including
construction, wholesale and retail trade and other sectors have led to the
deterioration of asset quality in those sectors.
Figure 1: Non-Performing Loan of Commercial
Banks
Source: Nepal Rastra Bank
Despite the increase in gross NPL, net NPL is below 2 percent
(1.66 percent in Chaitra, 2081). This is due to the sufficient provisioning
made by the banks against non-performing loans. The provisioning coverage ratio for NPL of the
commercial banks, which is a metric of the ability to absorb financial losses, stood
67.02 percent in Chaitra 2081. A total of 15 commercial banks have a provision
coverage ratio above 60 percent in Chaitra 2081.
Sector wise, fishery, agriculture
and construction sectors have higher NPL ratios. In Chaitra 2081, seven of the
16 sectors have NPL ratio of greater than 5 percent. In terms of the size of
loans, loans between Rs. 1 crore to 5 crores have a higher NPL. Average NPL of these
categories of loans is above 7 percent. In terms of loan product, credit card,
overdraft, long term hire purchase and long-term working capital loan have
higher NPLs.
Figure 2: Bankwise NPL Ratios
Source: Nepal Rastra Bank
Bankwise NPL ratios have
increased for all banks except two from Asar 2081 to Chaitra 2081. The number of commercial
banks having NPL ratio of five percent or above has increased to nine in
Chaitra 2081 compared to only one in Asar 2081. During this period, NPL of
eleven commercial banks have increased by one percentage point and NPL of four
commercial banks have increased by two percentage points.
In
the SAARC region, NPL in Bangladesh and Sri Lanka is above 10 percent. NPL has
been declining in India, Pakistan, Bhutan and Maldives since 2020 whereas it is
increasing in Nepal and Bangladesh.
Figure 3: NPL Ratio in the SAARC
Countries
Source: IMF FSI Database
3. Non-Banking Assets
Non-banking
assets of commercial banks is increasing significantly over the last three years
raising a concern for the management of non-banking assets. NBA has become more
than six-fold in Chaitra 2081 compared to Asar 2078. The ratio of NBA to total
Assets reached 0.5 percent in Chaitra 2081.
Figure 4: Non-banking
Asset
Bank
wise, NBA of 10 commercial banks has more than doubled during Asar 2080 to 2081
Chaitra while the NBA of six commercial banks has more than trebled during the
period.
4. Capital Adequacy
The
capital adequacy ratio (CAR) commercial banks has been under pressure. As of
Chaitra 2081, the average CAR of commercial banks stood at 12.35 percent,
declining gradually from Asar 2078.
Figure 5: CAR of Commercial Banks
Source: Nepal Rastra Bank
Out
of the 20 commercial banks, 19 commercial banks have maintained the CAR above
the regulatory minimum of 11 percent. The number of commercial banks having a
CAR of 12 percent and above is 13 and the number of commercial banks having CAR of 13 percent
and above is 4 only. In terms of core capital ratio, two out the 20 banks are
below 8.5 percent in Chaitra 2081.
In the regional context, all
of the countries in the SAARC have regulatory capital ratio above 11 percent.
However, position of Nepal and Bangladesh is relatively weak in the region.
Figure 6: Regulatory Capital
Ratio of the SAARC Countries
5. Earnings
Return
on assets (ROA) and return on equity (ROE) of commercial banks have been
gradually declining. Such ratios are declining continuously from Asar 2080. In
Chaitra 2081, the ROE of commercial banks was 7.57 percent and ROA was 0.71
percent.
Figure 7: ROA and ROE of Commercial Banks
In
terms of profitability and earnings in the SAARC Region, Pakistan, Maldives and
India have a higher ROE compared to other countries. ROA is higher in Maldives
and Pakistan.
Table
1: Profitability and Earnings Indicators of Banks in the SAARC Countries
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Source: IMF FSI Database
6. Conclusion
Financial
sector has been facing challenges during the recent years due to the slowdown
in global as well as domestic economic activities. NPL is increasing gradually
creating challenge in maintaining asset quality of the commercial banks. Along
with the NPL, non-banking assets of the banks has increased significantly. While
many countries in the South Asia have managed to reduce the NPL, it is
increasing in Nepal and Bangladesh. Looking sector wise, NPL is higher in the
sectors: fishery, agriculture, and construction, wholesale and retail trade
reflecting the slowdown of economic in these sectors. In terms of the size of
the loan, loans between Rs.1 crore to 5 crores have higher NPLs.
Banks
capital adequacy is declining. It is likely to constrain further lending by the
banks even though they have sufficient liquidity and lending capacity. Capital
adequacy of Nepal is relatively weaker in the South Asian Region. In addition,
bank earnings ratio is declining. ROE has declined by almost 5 percentage
points in the last two years.
These
trends have raised concerns for financial stability as such the central bank
should be further proactive to safeguard financial stability. In particular,
the Early Warning Systems and Credit Monitoring Framework should be further
strengthened and new roadmaps should be designed to reduce the NPL. In this
respect, measures like Prudential Framework for Resolution of Stressed Assets,
establishment of Asset Management, Asset Quality Review of the Banks, and
Guidelines for the Banks for managing their NPL could be some of the future
steps.
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