NPL of six finance companies at alarming level

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

Banks report 16% drop in profit, NPL up 10%

KATHMANDU, May 19, 2012

The net profit of commercial banks dipped 16.01 percent and at least two banks posted net loss in the first nine months of the current financial year, as the process of recovering debt absorbed by the now stagnant real estate sector moved ahead at a tardy pace.

The unaudited financial reports published by 32 commercial banks till Friday showed category ´A´ financial institutions generated a net profit of Rs 9.14 billion in the nine-month period till April 12 compared with Rs 10.88 billion in the same period last fiscal year.

The reports of top five private banks in terms of assets show mixed results. For instance, Nabil posted a profit of Rs 1.12 billion, up 19 percent, while Standard Chartered and Nepal SBI scooped up Rs 850 million and Rs 319 million in profit, a hike of 1.62 percent and 0.65 percent, respectively. Profits of two other top five banks - Himalayan and Nepal Investment - however, dropped 14.34 percent and 16.53 percent to Rs 570.22 million and Rs 801 million respectively.

The worst performers in the nine-month period were Kist Bank, which reported a net loss of Rs 153.73 million, and Century Bank, which was Rs 36.20 million in red.
“Profits of most of the banks shrunk in the review period and some even posted losses as they had to allocate bigger amount on loan loss provisioning as borrowers, especially those exposed to the real estate sector, failed to repay debts on time,” a renowned banker told Republica on condition of anonymity.

The country´s real estate sector has absorbed around Rs 100 billion in bank loans so far, according to Nepal Rastra Bank. Any problem in recovery of this debt means banks have to provision up to 100 percent of the amount extended as loans, unless credits extended by the banks are insured.

In the nine-month period, commercial banks allocated around Rs 5 billion for loan loss provisioning, from around Rs 4 billion in the same period last fiscal year, with Agricultural Development Bank Limited putting aside the highest amount (Rs 1.64 billion) for the purpose. Other banks such as Nabil assigned Rs 516.58 million and Standard Chartered Rs 144.40 million for provisioning.

Along with hike in provisioning amount, the portion of bad debts also went up at commercial banks. On average, the proportion of non-performing loans (NPL) of banks to the total credit went up 10.28 percent to hit 2.82 percent. This means 2.82 percent of total loan extended by commercial banks has turned into bad debt - a term which is used to explain loans, whose installments have not been paid for more than a year.

Some of the banks that saw the portion of NPL skyrocket in the third quarter were Sanima, NMB, Kist, Citizens and Kumari. Sanima Bank´s portion of bad debt, for instance, shot up 1,640 percent to 0.87 percent, while proportion of NPL at NMB Bank went up 889 percent to 2.77 percent. Likewise, Kist Bank reported NPL of 4.81 percent, up 651 percent, Citizens recorded bad debt proportion of 3.1 percent, up 588 percent, and Kumari Bank saw its NPL rise 312 percent to 4.46 percent.

“The hike in portion of non-performing loans suggests additional money went into provisioning that ate into banks´ profitability,” the banker said.

The profits of many banks also fell as they reported drop in interest income due to lethal combination of liquidity surplus and credit crunch.

Citizens Bank is one such institution. Although the bank´s provisioning for possible losses also went up by over 100 percent, the bank said it was also hit hard by 14.29 percent drop in interest income.

This happened after it attracted more money in forms of deposits but failed to give away this cash in form of loans to borrowers. “Because of this we spent too much amount paying interest on deposits parked in our bank,” Rajan Singh Bhandari, CEO of the bank, told Republica.

Since banks make most of their income by borrowing money from customers at a cheaper rate and then distributing it in forms of loans at a higher rate, failure to draw borrowers can eat away their profits.

Source: Republica