Banks holding non-banking assets worth over Rs 27bn

Non-banking assets of banks and financial institutions (BFIs) have increased significantly as their non-performing loan (NPL) levels rise.

A recent report by the Nepal Rastra Bank (NRB) shows that NPL levels of banks and financial institutions currently stand at 3.98 percent. Consequently, non-banking assets of commercial banks have increased by over Rs 15bn in a one-year period. Banks and financial companies (BFIs) have Rs 27.6bn worth of non-banking assets as of mid-May, compared to Rs 15.77bn worth of non-banking assets in mid-May 2023.

A large share of such assets is with commercial banks. According to the NRB, 20 Class ‘A’ banks in the country have Rs 23.74bn worth of non-banking assets, which is about Rs 10bn more than the Rs 13.19bn worth of non-banking assets they held in mid-May 2023.

Similarly, development banks have Rs 2.51bn worth of non-banking assets, up from Rs 1.7bn worth of such assets in mid-May 2023. Likewise, finance companies have Rs 1.34bn worth of non-banking assets. The Class ‘C’ companies had non-banking assets worth Rs 793m in mid-May 2023.

Non-banking assets are properties acquired by banks and financial institutions (BFIs) in settlement of their debts. When a borrower is unable to repay the loan in cash, banks seize properties pledged as collateral against such loans. BFIs are required to dispose of such assets at the earliest to convert these non-cash assets into cash assets for their regular banking business.

The central bank requires BFIs to set aside a provision equal to 100 percent of the asset’s value from the moment they acquire non-banking assets to mitigate risk. This requirement has led to an increase in the banks’ provision amounts.

Bankers are under stress due to the increase in non-banking assets. They have not been able to sell off these properties despite publishing auction notices repeatedly. The slowdown in real estate transactions has further aggravated the situation for them. 

Meanwhile, the existing land ceiling regulations have created problems for banks in acquiring such assets.

NRB preparing to open ‘Bad Bank’

The central bank has begun preparations to open a bad bank for the management of non-banking assets with different BFIs.

Speaking at a program recently, Governor Maha Prasad Adhikari said the central bank was drafting the necessary policies for establishing a bad bank.

A bad bank is an entity set up to buy the bad loans and other illiquid holdings of BFIs. BFIs holding significant non-performing assets can sell these assets to the bad bank at market price, which will give them liquidity to focus on their banking business.

The central bank has concluded that an asset management company should be established through specialized legislation. Stating that a bad bank would become a real estate company if it were to open under existing laws, the central bank has been advocating for the creation of an entity with special capabilities.