Rising Non-perfroming Assets

Non-performing assets (NPA) are those assets whose interest and or installment of principal is delayed and not received before a stipulated time. An asset becomes nonperforming when it stops to generate income; whether it is interest or principle. The international standard for an asset becoming non-performing is 90 days mark beyond normal installment reception day. The same standard has been followed by Nepal Rastra Bank in Nepal. That means when loan becomes 90 days overdue or outstanding, it is said to be non- performing.

NPA has been evergreen nightmare for the banking industry around the world. Banking industry is used as measure of economic growth of any country. Effect in banking industry has a great impact in the economy of country. NPA can paralyze the entire economy; the health of banking industry is reflected by NPA. Higher the NPA, greater will be risk of banks’ failure.

Impacts of Rising NPA

Financial performance of banks and financial institutions (BFIs) is affected severely by rising NPAs; because most of the time and effort (resources) are diverted by BFIs for the recovery process. This will further impact on the business functioning because BFIs are concentrating somewhere else. Also, BFIs get scared to lend money and make less risky investment that generates less income. Rising NPA has also serious impact on perception of customers, depositors and shareholders.

Rising NPA indicates operational inefficiency (poor performance) of banking institutions as well. The effects of rising NPAs in Nepalese banks are highlighted as under:

• Focus on recovery of loan and not on major business function
• Change bank’s psychology - restrict loan to productive sectors - choose risk free investment
• Affect customer, depositors and shareholders
• Reduces profitability of the bank and affects liquidity and solvency of the bank
• Disturbs capital adequacy ratio and cost of capital
• Reduces Economic Value Addition (EVA=Net Operating Profit after tax -
• Cost of capital)
• Creates negative image of the banks
• Affects stock price of the bank

Strategies to deal with NPA

The strategy to deal NPA can be categorized as

1. Preventive Measures
2. Curative Measures

1. Preventive Measures 

• Early Warning Signals
• Proper Credit Appraisal
• Organizational Restructuring
• Other Sources of Income
• Impact of Economic Changes

2. Curative Measures

• Recovery Department
• Debt Recovery Tribunal

1. Preventive Measures

They are used while approving loans or monitoring the loan facility. They prevent an asset to turn into non-performing.

Early Warning Signals

The situation of the client’s financial position and performance, operational efficiency, management, banking transaction, external factors that affect the customers must always be monitored and early warning must be provided.

Proper credit assessment of the client must be done. It can be done by properly analyzing 6 C’s (character, capacity, capital, collateral, condition, cash flow) of customer. Also, the credit auditing and the directives and policies of the regulators and organizations should be strictly followed.

Organizational Restructuring

Organizational restructuring includes improving managerial efficiency, skills up gradation for proper assessment of credit worthiness and a change in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the last resort.

Alternate Sources of Income

Alternate sources of income for banks may be commission and charges that are obtained from different activities such as bank guarantees, letter of credit, and remittance services etc. This will decrease dependency of banks in interest income and NPAs will have less impact on profitability.

Analysis of Economic Changes:

The banks should prepare watch list of clients vulnerable to becoming non performer because of adverse economic or business condition as they are exposed to these conditions.

2. Curative Measures

These are the steps taken to recover the asset once it becomes non-performing. Curative measures are medicine used in order to minimize the bad debt or recover the loan

Recovery Department

The major role of recovery department is recovering the substandard, doubtful and bad loans. It is a department within the credit department of a bank. It prepares delinquency report (report that includes clients whose installment or interest is due). It also continuously monitors delinquent client and follow up them by calling and visiting their sites, offices or home.

Debt Recovery Tribunal

Banking institutions can file a case against delinquent client in Debt Recovery Tribunal (DRT). It is however done only when there are no other ways to recover the bad asset. DRT has authority and power to give decision regarding the case. DRT is established under Bank and Financial Institution Debt Recovery Act, 2058 by Nepal Government. All the procedures regarding the legal processing is governed by this act itself.