Mounting Bad Loans Pose Challenge for Nepali Banks: Strategies Underway to Boost Profits

In a concerning trend, bad loans in commercial banks of Nepal have surged, surpassing one and a half kharba, according to Nepal Rastra Bank's statistics until Ashwin. The economic fallout from the Covid pandemic has exacerbated the issue, with banks reporting a total bad loan ratio of 3.61% by the end of Ashwin, amounting to 1.59 kharba rupees out of the 44.23 kharba rupees invested in loans.

The economic downturn has triggered difficulties in loan recovery, leading to auctions of numerous mortgages. Even properties auctioned off by the banks remain unsold, contributing to a rise in non-banking assets, reaching over 18 arba by Kartik.

Nepal Rastra Bank, in its annual supervision report, has highlighted the growing challenge of increasing bad loans and non-banking assets in the banking sector. The report attributes the problem to excessive investments in non-productive sectors post-Covid, affecting the profitability of banks.

Factors such as a post-Covid slowdown in the construction sector, over financing, diversion of loans from intended purposes, and rising interest rates have collectively impacted borrowers' ability to repay loans.

To counteract the adverse effects on profitability, banks are now strategically focusing on reducing bad loans. The non-satisfactory profits reported in the first quarter have prompted banks to prioritize loan recovery over expansion in the second quarter. Bankers assert that as bad loans decrease, profits increase, motivating their concentrated efforts on recovery to navigate these challenging times.