More financial institutions end up in red
KATHMANDU, JUNE 06:
The number of small finance companies and development banks incurring losses increased in the past quarter, while larger financial institutions were able to earn enviable profits.
Among the licensed financial institutions that have published their financials, the unaudited financial statements of one commercial bank, 14 development banks and 13 finance companies for the third quarter show cumulative losses of more than Rs 1.3 billion.
During the second quarter, there were 15 development banks and 10 finance companies that had incurred losses of about Rs one billion. On the other hand, larger commercial banks have been able to increase their profits by more than 40 per cent in the third quarter.
The piling up of bad loans and subsequent provisioning has eaten up prospects of profits for development banks and finance companies. The average non-performing assets of these loss-incurring financial institutions is higher than 17 per cent of the total loans. The industry average non-performing assets of commercial banks stands at three per cent, for development banks at 5.8 per cent and finance companies at 9.4 per cent.
International Development Bank has incurred the highest loss with its financials showing loss worth Rs 202.5 million as the class ‘B’ financial institution had to set aside Rs 285.9 million to provision against bad loans —an amount higher than
its operating profit. Its non-performing asset is higher than 10 per cent.
Likewise, Vibor Bikas Bank and Synergy Finance also suffered through losses of Rs 195.4 million and Rs 134.16 million, respectively, in third quarter. Among commercial banks, Kist Bank continued to incur losses in the quarter with losses worth Rs 55.01 million with non-performing assets of 7.89 per cent.
“Smaller institutions with less paid up capital do not have the capacity to absorb shocks so if a few large borrowers default on loans then it is difficult to make profit,” said president of Nepal Finance Companies’ Association Rajendra Man Shakya.
Financial institutions are required to provision 25 per cent of the principal and due interest if borrowers fall behind the payment schedule for three months, 50 per cent if delay in repayment crosses six months, and 100 per cent provisioning is required after that. So, the higher the amount of non-performing loans, the higher is the provision required. This in turn leads to higher chances of incurring losses.
Development banks have provisioned Rs 1.9 billion for loan loss in the third quarter, which is 44 per cent higher than the amount set aside in the second quarter. Likewise, finance companies have set aside Rs 1.09 million for possible loan loss, which is 40 per cent higher than the amount provisioned in the second quarter. Loans floated to land plotting and crusher industries have particularly become toxic for financial institutions.
“The root cause of mounting losses of financial institutions is the high level of provisioning that exhausts the income and reserves as well,” said Shakya.
In the last one quarter, general reserves of finance companies have declined by Rs 85 million, while that of development banks increased by Rs 80 million and of commercial banks by Rs 300 million.
“Losses are increasing at present because the sectors where these financial institutions have invested heavily in are not in good shape,” pointed out spokesperson for Nepal Rastra Bank Bhaskar Mani Gyanwali.
“Profits and losses are also of a cyclical nature. A couple of years back financial institutions were enjoying good profits. After the present phase is over, they will once again be flush with funds.”
Source: THT
