Banks Struggle with Loan Recovery, Boost Profits by Cutting Provisions
In the first quarter of the current fiscal year 2083/84, the average non-performing loan (NPL) ratio of 20 commercial banks reached **5.64 percent**, up from **4.86 percent** in the same period last year. However, banks have reduced their loan loss provisions by **44.9 percent**, pushing net profit above **NPR 19.14 billion**. The decline in provisions amid rising NPLs points to long-term risks.
Kathmandu. Banks are still struggling with bad loan recovery. As borrowers' repayment capacity weakens, non-performing loans are on the rise. However, the amount set aside for potential loan losses has decreased. Although loan recovery has not improved as expected, the reduction in provisions has provided relief to banks' profits.
In the first quarter of the current fiscal year 2083/84, the average non-performing loan ratio of 20 commercial banks has reached 5.64 percent. In the same period of the previous fiscal year, this ratio was 4.86 percent. Non-performing loans increased by 0.78 percentage points in a year. This shows that the challenge in loan recovery remains.
However, during the same period, banks have reduced the amount allocated for loan loss provisions by 44.9 percent. The amount, which was NPR 20.14 billion in the first quarter of last year, has fallen to NPR 11.09 billion in the same period of the current fiscal year. In other words, banks have reduced the amount set aside for potential loan loss provisions by about NPR 9 billion.
Lower provision amounts reduce banks' expenses, directly impacting net profit. In the first quarter of the current fiscal year, the net profit of commercial banks has exceeded NPR 19.14 billion. With NPLs rising, the reduction in provisions appears to have provided additional relief to banks' profits.
Banks claim that they have intensified loan recovery efforts, improved the classification of some loans, and reduced the need for previously set-aside provisions. They believe that declining interest rates have made it easier for borrowers to repay.
What is the basis for the decline in provisions?
The decline in loan loss provisions is not uniform across all banks. Nabil Bank's provision has decreased by 74.66 percent, while Sanima, Kumari, Rastriya Banijya Bank, and Nepal Investment Mega Bank have also seen declines of more than 60 percent. However, Prime Commercial Bank's provision has increased by 28.30 percent to NPR 617.1 million. This indicates that banks' loan portfolios and risk assessment situations differ.
The reduction in loan loss provisions could be due to loan recovery, improved loan classification, or reduced need for previously made provisions. However, with NPLs rising, the reason for the decline in provisions needs to be clear. If provisions have been reduced without improving loan recovery, it could expose banks to further risk in the future.
A reduction in provisions provides immediate relief to banks' profits and distributable profits. But if loan recovery weakens later and additional provisions are required, it could impact profits and capital funds.