KATHMANDU, Jan 8, 2013
At least six finance companies have corroded their balance sheets with high levels of bad debts, indicating they may soon land in trouble if non-performing loans are not recovered from defaulters immediately.
First quarter balance sheets of Arun Finance, Hama Merchant and Finance, Lalitpur Finance, Nepal Finance Limited (Nefinsco), Patan Finance and Prudential Finance show their non-performing loans (NPL) hovering at up to 48 percent, meaning payments on huge chunk of credit issued by these companies have not been made.
The tendency of defaulting on debt payment poses a threat to depositors as it breaks the cash flow cycle at financial institutions. And as the problem of cash shortage becomes chronic, institutions start deferring payment to depositors, eventually making them vulnerable to runs.
“Haphazard lending practice is the root cause for the problem seen in many finance companies,” a high-ranking official of Nepal Rastra Bank told Republica on condition of anonymity, as he was not authorized to talk to the media.
“Many companies have failed to recoup significantly big chunk of loans that went to the real estate sector, which is now dormant. The same applies to most of the short-term loans, like working capital and personal, which are suspected to have eventually made their way to the realty sector.”
A snapshot of what the central bank official said could be seen in Dharan-based Arun Finance, whose NPL stood at 48.21 percent of the credit portfolio till the end of first quarter of the current fiscal year.
“The NPL level at the company is on the higher side because of failure to recoup personal loans and credit extended to the real estate sector,” Karna Bahadur Shahi, an official at the finance company, said.
Although the company´s credit portfolio shows 8.5 percent exposure to the real estate sector, it is suspected to have incurred heavy losses by extending personal loans, as its ´other loans´ segment, which includes personal loans, makes up almost 70 percent of the credit portfolio of Rs 142.94 million.
The situation is almost the same at Hama Merchant and Finance, which recorded NPL at 38.49 percent of the credit portfolio in the first quarter. Like in Arun´s case, 71 percent of the total credit issued by Hama was made up of ´other loans´. Patan Finance, which saw 25.41 percent of the total loans turning into NPL in the first quarter, too extended 66 percent of the total credit as ´other loans´. And situation was worse at Nefinsco - which accumulated 20.26 percent NPL - with 81 percent of the total credit extended as ´other loans´.
Situation at Lalitpur Finance, which is also one of the biggest bad debt holders, is a bit different though. The finance company, which reported NPL at 33.20 percent of the credit portfolio in the first quarter, was bogged down by heavy exposure to the real estate, as its real estate lending stands at 45 percent of the total credit portfolio. It also kept aside Rs 371.78 million in the first quarter to guard against loan losses, leading it to post a net loss of Rs 374.46 million in the quarter.
Prudential Finance, on the other hand, seems to be in an even deeper problem. It not only holds NPL of 32.48 percent but its loan portfolio of Rs 854.64 million surpasses deposit portfolio of Rs 663.79 million.
Source: Republica
At least six finance companies have corroded their balance sheets with high levels of bad debts, indicating they may soon land in trouble if non-performing loans are not recovered from defaulters immediately.
First quarter balance sheets of Arun Finance, Hama Merchant and Finance, Lalitpur Finance, Nepal Finance Limited (Nefinsco), Patan Finance and Prudential Finance show their non-performing loans (NPL) hovering at up to 48 percent, meaning payments on huge chunk of credit issued by these companies have not been made.
The tendency of defaulting on debt payment poses a threat to depositors as it breaks the cash flow cycle at financial institutions. And as the problem of cash shortage becomes chronic, institutions start deferring payment to depositors, eventually making them vulnerable to runs.
“Haphazard lending practice is the root cause for the problem seen in many finance companies,” a high-ranking official of Nepal Rastra Bank told Republica on condition of anonymity, as he was not authorized to talk to the media.
“Many companies have failed to recoup significantly big chunk of loans that went to the real estate sector, which is now dormant. The same applies to most of the short-term loans, like working capital and personal, which are suspected to have eventually made their way to the realty sector.”
A snapshot of what the central bank official said could be seen in Dharan-based Arun Finance, whose NPL stood at 48.21 percent of the credit portfolio till the end of first quarter of the current fiscal year.
“The NPL level at the company is on the higher side because of failure to recoup personal loans and credit extended to the real estate sector,” Karna Bahadur Shahi, an official at the finance company, said.
Although the company´s credit portfolio shows 8.5 percent exposure to the real estate sector, it is suspected to have incurred heavy losses by extending personal loans, as its ´other loans´ segment, which includes personal loans, makes up almost 70 percent of the credit portfolio of Rs 142.94 million.
The situation is almost the same at Hama Merchant and Finance, which recorded NPL at 38.49 percent of the credit portfolio in the first quarter. Like in Arun´s case, 71 percent of the total credit issued by Hama was made up of ´other loans´. Patan Finance, which saw 25.41 percent of the total loans turning into NPL in the first quarter, too extended 66 percent of the total credit as ´other loans´. And situation was worse at Nefinsco - which accumulated 20.26 percent NPL - with 81 percent of the total credit extended as ´other loans´.
Situation at Lalitpur Finance, which is also one of the biggest bad debt holders, is a bit different though. The finance company, which reported NPL at 33.20 percent of the credit portfolio in the first quarter, was bogged down by heavy exposure to the real estate, as its real estate lending stands at 45 percent of the total credit portfolio. It also kept aside Rs 371.78 million in the first quarter to guard against loan losses, leading it to post a net loss of Rs 374.46 million in the quarter.
Prudential Finance, on the other hand, seems to be in an even deeper problem. It not only holds NPL of 32.48 percent but its loan portfolio of Rs 854.64 million surpasses deposit portfolio of Rs 663.79 million.
Source: Republica
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