Bankers say with the slowdown in business activities, rising inflation, and high-interest rates, borrowers' ability to repay the loans has weakened and this has led to a surge in the number of 'blacklisting' of the people by banks and government authorities who are unable to repay the loans.
According to bankers, due to the drastic slowdown in the real estate market, banks are not able to recover loans easily even through auctioning the real estate properties. "Small and medium enterprises, agricultural enterprises, hotels and tourism firms, schools/colleges, and companies in the construction sector are unable to repay their debts," said a banker. Prasain's campaign has alarmed the bankers. Issuing a joint statement on March 2, Nepal Bankers’ Association, Development Bankers Association Nepal, Nepal Financial Institutions Association, and Nepal Microfinance Bankers’ Association drew the government's attention amid threats and manhandling of the staff of BFIs by unidentified people. The associations said that calling not to repay loans and inciting violence will invite anarchy which would not benefit anyone in the country. According to them, it will further complicate the situation and affect economic activities. "It is the responsibility of borrowers to repay the principal amounts and interest of the loans they've availed. It is anarchy to refuse to settle the financial liabilities," reads a joint press release issued by the umbrella organizations of the BFIs. According to a senior official at the Nepal Rastra Bank, Prasain’s campaign could cause some of his followers to default on the loans. “But the ultimate victims of following such a campaign will be those who fail to repay the loans regularly,” the official said. “BFIs will recover their loans anyway because almost all the loans in the country have been provided against the collateral.” The NRB official claimed that Prasain has been making an effort to make his campaign a springboard to elevate his political ambitions but his followers who will be inspired not to pay the loans would suffer finally. “It may take some time to recover the loans, but BFIs will definitely recover the debts,” he said. While the debt default rate in Nepal is relatively low so far but the worrying sign is, the rise in the non-performing loans (NPLs) of the banks. As of mid-January, the NPLs of commercial banks stood at 2.54 percent while development banks' NPLs stood at 2.47 percent and finance companies at 5.79 percent. “NPL level of banks in Nepal is relatively lower compared to their South Asian peers,” the NRB official said. But the quality of loans has become a concern for the central bank as well as international agencies like the International Monetary Fund (IMF). The IMF’s Article IV consultation mission which concluded its visit last month has stated in its initial observation report that bank asset quality in Nepal has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima. “The discussions recognized the need for the Nepal Rastra Bank to ensure appropriate reclassification of loans and close monitoring of the impact of a potential deterioration in repayment capacity of borrowers,” the IMF said. Continuing to advance reforms on banking regulations and supervision and ensuring bank asset quality, and further strengthening NRB’s governance by amending the NRB Act in line with best international practices are the commitments Nepal made to the IMF to receive funding under the Extended Credit Facility (ECF). As international agencies like the IMF have been warning about the quality of the loans, the central bank is concerned that the campaign run by Prasain can cause an increase in debt defaults further. How the defaults affect the bank can be gauged from painful rehabilitation measures taken to rescue Rastriya Banijya Bank and Nepal Bank in the early 2000s. The credit rating agency ICRA Nepal in its recent report has also pointed out a looming challenge to the Nepali banking sector. "While the rise in NPAs during the first half of the financial year can be partly attributed to the industry seasonality, the ongoing challenges led by increased interest rates, erosion in the credit profile of the borrowers as discussed in earlier sections, the inability of the banks to extend credit facilities under a new regulatory regime, etc have exacerbated the liquidity concerns and weakened the debt-servicing ability of the borrowers; which could continue the pressure on banking sector asset quality going forward," reads the report. According to the report, the probable deterioration in asset quality of banks in subsequent quarters could result in the need for recapitalization, given the moderate capital cushion of many banks. “However, the ability of the banks to recapitalize through equity issuance could remain a challenge given the weak to moderate profitability outlook for the banking sector," states the report.
