Non-performing loans (NPL) of commercial banks have decreased to a 10-year low, loan exposure to real estate has declined to “historically low levels”, and credit to deposit ratio has come down notably, a World Bank report has said.

A significant easing of liquidity pressure, rising profits, and improved capital position are other factors that show the ongoing financial consolidation in the sector is paying off, according to the report.

The report titled “Nepal Development Update” states that NPL of commercial banks came down to 2.5 percent in fiscal year 2012-13, the lowest in a decade. Loans not repaid timely are called NPL.

Six banks (28 percent of the system) reported NPL in excess of 3 percent, of which only two (8 percent of the system) had NPL in excess of 5 percent, including one state-controlled bank (Agriculture Development Bank Limited—6 percent of the system).

Eight banks (22 percent of the system) recorded NPL below 1 percent. Most of the remaining banks had NPL between 1 and 2 percent. Two state-owned banks—Nepal Bank Limited and Rastriya Banijya Bank—appear to have achieved a significant turnaround in loan recovery, the report says.

But it cautioned there are risks that the officially-reported NPL data may understate the asset quality problem owing to ever-greening and other reporting issues.

The report said the banks’ loan exposure to real estate has decreased to historically low levels of 14.9 percent from previous fiscal’s 17.1 percent. As a result, in fiscal year 2012-13, only six commercial banks (16 percent of the system) had exposure to real estate in excess of 20 percent, against 13 banks (33 percent of the system) in the previous fiscal. “None of banks have real estate exposure in excess of 25 percent,” states the report.

However, it said the exact risks from real estate and other credit exposure as well as vulnerability to potential loss of depositors’ confidence could confirm only after the results of the ongoing stress tests and in-depth diagnostics of the financial sector institutions are conducted.

Nepal Rastra Bank (NRB) Deputy Governor Maha Prasad Adhikari agreed to the World Bank assessment, saying the banking system has been on a steady recovery path and their exposure to real estate did not result in a full-blown crisis as initially predicted. “There is no threat to the system from the current level of exposure to real estate although some bank and financial institutions are affected,” said Adhikari.

According to the NRB, loan exposure of banks to the real estate currently stands at around Rs 66 billion—down from Rs 100 billion when the real estate sector headed to recession four years ago.

Adhikari said the stringent policy measures taken over the last few years also led the system to recovery, while banking institutions provided loans in a more balanced way.

Commercial banks, witnessing abundant liquidity in the last quarter of the last fiscal year, posted record annual net profits. The commercial banking industry posted a record annual net profit of Rs 20.1 billion the last fiscal year compared to Rs 15.5 billion in the previous fiscal. This was possible due to higher net interest income with the growth of 35 percent, foreign exchange earnings and write back of loans, the report says.

According to the report, the overall capital position of commercial banks also improved significantly owing to capital injections in state-controlled banks and increased retained earnings.  The average capital adequacy ratio (CAR) stood at 14.2 percent in the last fiscal year compared to 12.1 percent the previous fiscal.

All banks have met the minimum CAR of 10 percent (plus 1 percent buffer capital) except two state-controlled banks—Nepal Bank Limited and Rastriya Banijya Bank.

Their CAR also improved with NBL maintaining a CAR at negative of 0.5 percent from the negative of 5.5 percent a year ago, while RBB showing a positive CAR of 3.3 percent from a negative of 9.3 percent a year ago.

source: the kathmandu post,27 Oct 2013