" Such institutions less vulnerable to credit‚ liquidity impacts due to low exposure to real estate sector"

Most of the national-level development banks are financially capable to cushion impact of various shocks, as their exposure to the real estate market is within safe limits and liquidity is at a comfortable level, shows a latest report of Nepal Rastra Bank (NRB).

The stress test of 18 out of the 20 national-level development banks, which hold deposits of over Rs two billion, showed that capital adequacy ratio (CAR) of only three banks would fall below 10 per cent level if 15 per cent of the credit turned into substandard loans — credit whose installments have not been paid for three to six months.

Similarly, CAR of only two banks would drop below 10 per cent level if 25 per cent of the loan extended to real estate and housing sectors turned into bad debt, the results of stress test conducted in mid-January show. Likewise, CAR of five banks would fall below 10 per cent level if five per cent of the total credit turned into bad debt.

These results are better than that of commercial banks, as around 90 per cent of class ‘A’ financial institutions would have seen their CAR fall below 10 per cent mark if they received a standard credit shock. Similarly, around 30 per cent of commercial banks would have seen their CAR dip below 10 per cent level if 25 per cent of loans extended to real estate and housing sectors turned into bad debts.

CAR gauges a banking institution’s strength to absorb shocks and ability to extend loans. As per NRB, commercial banks should maintain CAR of at least 10 per cent, while development banks have to maintain CAR of at least 11 per cent. If the ratio falls below minimum regulatory requirement, NRB takes prompt corrective action and even declares such institutions as ‘troubled’.

“In general, development banks remain less vulnerable to credit and liquidity shocks,” said the NRB report.

One of the reasons why national-level development banks are less susceptible to various shocks is low exposure to real estate sector, which had crashed a few years ago and is still struggling to get back on its feet.

As of mid-January, development banks had extended Rs 12.69 billion in real estate loans, which made up 8.7 per cent of credit portfolio, down from 9.7 per cent in mid-July, 2013. Also, all development banks were in a comfortable position in terms of liquidity in mid-January, as ratio of net liquid asset to total deposits stood at 32.1 per cent at that time.

Because of this liquidity position, CAR of only one national-level development bank is expected to fall below 10 per cent mark if 10 per cent of the deposit is withdrawn, showed the stress test result. Similarly, CAR of five development banks would drop below 10 per cent level if 15 per cent of the deposit is withdrawn.

However, national-level development banks are likely to land in trouble if 20 per cent of their deposit is removed, as the stress test showed that 12 institutions, or 67 per cent of banks surveyed, would see their CAR fall below 10 per cent level if 20 per cent of their deposit is withdrawn.

NRB had made it mandatory for development banks to conduct stress test from January and they have to submit results to the central bank on a quarterly basis.

Stress test results
> CAR of three banks would fall below 10pc if 15pc of credit turned into substandard loans
> CAR of five banks would fall below 10pc if five per cent of total credit turned into bad debt
> CAR of two banks would drop below 10pc if 25pc of the loan extended to real estate and housing sectors turned bad
> CAR of one national-level development bank to fall below 10pc if 10pc of deposit is withdrawn
> CAR of five development banks would drop below 10pc if 15pc of the deposit is withdrawn

source: the himalayan times,28 aug 2014