NRB adds 'watch list' to loan categories

KATHMANDU:

Nepal Rastra Bank (NRB) has revised its loan classification list, adding a component called ‘watch list’, under which additional provisioning should also be made for loans on which principal and interest payments are regularly being made.

Currently, the central monetary authority has classified loans into four categories, namely, ‘pass’, ‘substandard’, ‘doubtful’ and ‘loss’. Based on these classifications, banks and financial institutions have to provision an amount equivalent to one per cent of the total loan to 100 per cent of the total loan as a buffer against possible defaults.

With the addition of the new component, BFIs will now have to classify loans into five categories.

First is the ‘pass’ loan, which refers to loans on which principal or interest payments are not overdue or are overdue by up to three months. Such loans require provisioning of one per cent of the total loan amount.

Second is the ‘watch list’ loan. These types of loans are similar to ‘pass’ loans. However, five per cent of the total loan amount must be provisioned for such credit, says an NRB directive issued today.

Higher provisions should be made for ‘watch list’ loans because of mismatch in firm’s inflow and outflow of cash, adds the directive.

Here, let’s consider this example. Say, a firm has acquired Rs 100 million in working capital loan from a bank. The firm, however, needs to pay equal amount to a supplier around the time when installments have to be made to the bank.

If the borrower’s cash flow cannot support both the payments, then the loan acquired by the firm should be classified as ‘watch list’.

Also, loans acquired by firms whose working capital, cash flow or networth have remained negative for two consecutive years have to be classified as ‘watch list’, even if the firm is making timely principal and interest payments, says the NRB directive.

Loans should also be categorised as ‘watch list’ if the credit obtained by the same borrower from another financial institution turns into non-performing asset. Among others, credit obtained by borrowers, who have missed monthly, quarterly or half-yearly installment payment deadlines, should also be categorised as ‘watch list’, adds the directive.

Another type of loan, as per NRB, is ‘sub-standard’, which refers to credit on which principal or interest payments are overdue by over three months but not by more than six months. Such loans require provisioning of 25 per cent of the total loan amount.

Similarly, loans are classified as ‘doubtful’ if principal or interest payments are overdue by over six months but not by more than a year, while credit is categorised as ‘loss’ if principal or interest payments are overdue by over a year. Such categories of loans require provisioning equivalent to 50 per cent and 100 per cent of total credit, respectively.

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Source: THT