The fiscal year 2023/24 ended on a positive note for Nepalese commercial banks, as their bad debts (non-performing loans) dropped to 3.76% from a high of 3.89% just three months earlier. This reduction in bad debts reflects strategic recovery efforts and the Nepal Rastra Bank’s (NRB) supportive monetary policies. In this analysis, we will explore the when, why, and how behind this improvement, breaking down the data and examining the underlying reasons.

Timeline of the Decline

The significant reduction in bad debts occurred during the last quarter of FY 2023/24:

• Mid-January 2023: The bad debt ratio was 2.63%.
• Mid-April 2023: The ratio surged to 3.89%, marking the peak of non-performing loans.
• Mid-July 2023: By the end of the fiscal year, the ratio declined to 3.76%.

This timeline highlights the banks' efforts to stabilize their financial positions during the final stretch of the fiscal year.

Reasons for the Decline

1. Strategic Focus on Loan Recovery:

During this period, banks focused on recovering non-performing loans rather than issuing new ones. This strategic shift allowed them to improve their balance sheets. Borrowers responded to this recovery-focused approach, settling outstanding debts before the fiscal year ended.

2. Monetary Policy Adjustments:

The NRB’s monetary policy extended repayment deadlines, particularly for construction entrepreneurs, easing the burden on borrowers. Financial institutions were allowed to waive blacklisting for borrowers who cleared their dues and continued making payments, encouraging more borrowers to address their outstanding debts.

3. Economic Context:

A drop in aggregate demand limited banks' ability to issue new loans, forcing them to concentrate on recovering existing ones.

Key Data and Trends

Bad Debts:

• Mid-July 2022: 1.16%
• Mid-January 2023: 2.63%
• Mid-April 2023: 3.89%
• Mid-July 2023: 3.76%

Development Banks and Finance Companies:

• Development Banks: A slight decrease in bad debts from 3.63% to 3.62%.
• Finance Companies: A more significant reduction from 10.40% to 9.87%.

Capital Adequacy Ratios:

• Standard Chartered Bank: Highest at 17.16%.
• NIC Asia Bank: Lowest at 11.18%.

Underlying Causes

The rise in bad debts earlier in the fiscal year posed a risk to the stability of the banking sector. Addressing this issue was crucial to avoid a potential financial crisis.

Banks are required by NRB regulations to maintain specific levels of provisioning for different categories of non-performing loans. Reducing bad debts allowed banks to free up capital otherwise tied up in provisioning.

By improving their financial health, banks are better positioned to support economic recovery efforts through responsible lending.

Conclusion

The decline in bad debts among Nepalese commercial banks by the end of FY 2023/24 is a positive development, driven by strategic recovery efforts and supportive monetary policies. However, challenges remain, and sustained vigilance will be necessary to maintain these gains. Moving forward, banks must continue to balance loan recovery efforts with the need to support economic growth, while the NRB's regulatory framework will play a critical role in guiding the sector through ongoing economic uncertainties.

This analysis emphasizes the importance of proactive measures in stabilizing the financial sector, and while progress has been made, it serves as a reminder of the continuous efforts needed to ensure long-term stability and growth.