Non-banking assets of banks and financial institutions have increased by a whopping 71.89 percent in one year. 

Such assets, which stood at Rs 23.71bn in mid-January last year, have now reached Rs 40.75bn, suggesting that the number of people unable to repay loans has increased, while buyers of auctioned properties have decreased.

When borrowers fail to pay the principal and interest within the specified time, banks put up collateral pledged by the borrowers for auction. Banks and financial institutions have to take ownership of such properties themselves if they fail to find buyers through auction. They are required to sell these properties as soon as possible.

However, Nepal Rastra Bank (NRB) data shows that properties put up for auction by banks have stopped selling. As a result, the size of non-banking assets that banks hold is expanding. Additionally, banks must maintain a 100 percent loan loss provision for such assets from the date of acquisition to protect against risk. This causes an increase in provisioning amounts, thereby hitting the profitability of banks.

Non-banking assets have accumulated in banks and financial institutions due to increasing loan defaults and unsold auctioned properties. The total loans of banks and financial institutions amount to Rs 5,435trn. According to the central bank, the total loan amount, including loan loss provisions, is currently at around Rs 5,700trn.

Non-banking assets account for 0.75 percent of total loans extended by banks. Banking expert Anal Raj Bhattarai says risk is increasing as non-banking assets approach one percent of total loans.

According to NRB, commercial banks hold 80.12 percent of total non-banking assets in the banking system. Twenty commercial banks alone hold Rs 32.46bn worth of non-banking assets—a 64.29 percent increase from last year’s Rs 18.89bn.

Similarly, 17 development banks have Rs 3.65bn worth of non-banking assets—a rise of 45.35 percent compared to Rs 2.51bn last year. Non-banking assets with finance companies have also gone up by 72.59 percent to Rs 2.27bn.

As per the property ceiling rule, banks must dispose of these assets within three years. They must receive approval from the government if they fail to sell off these assets within three years.

However, banks are facing challenges in the management of assets, which they are struggling to dispose of, according to Bhattarai. “The non-performing loans (NPL) ratio has reached around five percent compared to just around one percent three years ago. It is still increasing,” Bhattarai said. “Our economy’s drivers are not moving at a rapid pace. As a consumption-based country, we have not been able to increase production. Real estate transaction prices have increased significantly, while people’s purchasing power is not going up at the same pace.”

Bhattarai said the economy is tightening from all sides. “There is low business turnover, no new job creation, and the Nepali rupee has fallen from 120 to around 140 per dollar over the past three to four years. There is a big difference between pre-covid and now. This has made imported goods increasingly expensive,” he added. “This has increased the cost of living. As living costs increase, loan repayment capacity decreases.”

With non-banking assets rising, bankers have felt the need for a bad bank. The NRB announced through the monetary policy that a bad bank would be established.

“An asset management company requires capital. This capital needs financial commitment from various institutions, including the government,” Bhattarai said. “The central bank should focus on policy reforms for now, keeping the bad bank in long-term planning,” he added.

Bankers say they can find a solution to non-banking asset problems only if an asset management company is established as soon as possible. “The current situation in banks has arisen because loans deteriorated and turned into bad loans,” Nepal Bankers Association (NBA) President Santosh Koirala said. “Banks have been failing to dispose of non-banking assets despite repeated attempts.”