Will new rule on loan provisioning affect sharemarket, shareholders income?
ShareSansar, March 17:
The addition of a new provisioning category by Nepal Rastra Bank (NRB) requiring commercial banks to set aside 5 percent from the current 1 percent in case of certain loans has caused ripples in the finance sector.
As per the new rule, banks must set aside 5 percent of the loan amount as safety net even in case of loans that have not defaulted or are late by less than three months.
The banks say that the new rule would compel the banking sector to set aside more than Rs 30 arba for risk management. It would have a serious impact on the balance sheets of the banks, and it will have an adverse impact on the share market as well.
Till now the banks were allowed to consider even some of the loans that had defaulted by more than three months as good loans and set aside just 1 percent provisioning.
The banks and finance Institutions are in a panic mode as most of them are not prepared for the new provisioning arrangement.
According to Mr Anil Shah, the CEO of mega bank and vice-president of Nepal Bankers’ Association, the new rule on provisioning will have an effect on the entire economy. “There has to be a serious discussion before the new rule goes into effect,” said Mr Shah, adding, “It will affect the stock market and it will be hard even for the well-performing banks to offer dividends to shareholders.”
Mr Shah said NBA would try to convince the NRB to amend the rule.
Mr Bharat Raj Dhakal, first vice-president of Development Bankers’ Association, said the new rule will affect the net worth of even the A grade banks, whose profit is likely to decrease by 10 to 15 percent. “It will affect the balance sheet of banks and finance institutions as well. It is also the reason why the secondary market responded negatively to the new rule and dropped several notches recently,” Mr Dhakal said.
We will try to persuade NRB to make some changes to the new rule on provisioning
Before the introduction of the new category, bank loans were categorized as: Pass, or asal (loans that have not defaulted on interest by more than three months); Sub-standard, or kamsal (loans that have defaulted by three to six months; doubtful, or sankaspad (loans that have defaulted from six months to 1 year); and loss, or kharab, loans that have defaulted by more than a year.
Now, the NRB has included a new category called Watch list, or sukshma nigrani, as a new provisioning category with same default period as the Pass, or asal, loans.
Banks and finance institutions have floated a loans a total of Rs 12 kharba 48 arba 8 crore 85 lakhs, out of which commercial banks have floated loans of Rs 10 kharba 13 arba 72 crore, development banks Rs 1 kharba 68 arba 67 crore 58 lakhs and finance institutions Rs 65 arba 69 crore 25 lakhs.
Bankers say it is impossible for the BFIs to recoup more than 50 percent interest and principle amount in case of loans in time even if they worked really hard for the recovery.
At present, 90 percent of the total loans floated in the market have defaulted by more than three months, out of which around 50 percent are set to fall in the newly introduced Watch list category. It translates into Rs 6 kharba of loans under the watch list, provisioning for which is likely to be more than Rs 30 arba.
In this situation, as a huge chunk of money will be held up for provisioning, it will squeeze liquidity and force banks and finance companies to be less generous at proving dividends to shareholders and be more strict in providing loans. The interest on deposits is also likely to fall.
Meanwhile, as per a recent NRB report, in the first six months of the current fiscal year, banks have earned a massive profit. As per the NRB, the banks earned a net profit of Rs 19 arba 52 crore 27 lakhs in that period. Out of the total, commercial banks earned Rs 15 arba 46 crore 59 lakhs, development banks Rs 2 arba 88 crore 18 lakhs, and finance companies Rs 1 arba 17 crore 50 lakhs.
