The management of non-banking assets (NBAs) has become an increasing concern for banks and financial institutions as the Nepali economy stagnates. Bankers attribute the core issue to the inability to offload these assets.

The rise in NBAs is directly linked to regulations that require banks and financial institutions (BFIs) to auction assets pledged as collateral if loan recovery proves difficult. While these assets are meant to be sold promptly once acquired, prevailing market conditions have made this task challenging for banks. Moreover, banks are required to set aside 100% of the asset's value in provisions until these non-banking assets are sold.

Non-banking assets continue to pile up in the balance sheets of banks and financial institutions as the real estate market stagnates. These assets are no longer considered active, necessitating full provisions, which remain on the books until the assets are sold and the loans fully settled. This delay is creating a gap in the income statement which can remain unresolved for an extended period.

Although banks have been publishing auction notices to get rid of their non-banking assets, bankers say there is a lack of activity in this area. The slowdown in the real estate sector mainly due to restrictive government land classification policies has made it even harder to dispose of these assets. BFIs that ignored expert advice to stay away from the unproductive real estate market are now grappling with mounting risks.

The banking sector is also dealing with a sharp increase in non-performing loans (NPLs) which has significantly contributed to the surge in NBAs. Data from Nepal Rastra Bank (NRB) shows that the total value of NBAs held by banks and financial institutions (BFIs) rose by Rs 16.34 billion to Rs 38.26 billion by mid-November (Kartik) of the current fiscal year. This marks a staggering 74.59% increase from Rs 21.91 billion during the same period last year.

The surge in NBAs is primarily driven by an increase in NPLs. The average NPL ratio across BFIs climbed from 3.66% last year to 4.61% this year - an increase of nearly a percentage point.

In the first four months of FY 2024/25, non-banking assets (NBAs) witnessed substantial growth across various financial institutions. Commercial banks reported a 77.5% surge, with NBAs rising by Rs 14.11 billion to a total of Rs 32.33 billion. Development banks saw a 53.58% increase, reaching Rs 3.66 billion, while finance companies experienced a 72.33% growth, pushing their NBA total to Rs 2.26 billion.

Some bankers attribute the rise in non-banking assets (NBAs) to sluggish economic activity, cash flow challenges faced by businesses, and insufficient capital spending by the government. Sudesh Khaling, CEO of Everest Bank, highlighted the slowdown in the real estate sector as a key factor behind the increase in NBAs. "The only way to reduce NBAs is to sell these assets as quickly as possible," he said, adding that loans extended to small and medium-sized enterprises (SMEs) have been particularly challenging to recover.

Sunil KC, CEO of NMB Bank, pointed to rising credit delinquency as a key factor behind the surge in non-performing assets which has subsequently fuelled the growth of NBAs.

In response to the economic challenges exacerbated by the COVID-19 pandemic and geopolitical tensions like the Russia-Ukraine war, the central bank has gradually eased its monetary policy. The NRB has raised share mortgage loan limits, extended timelines for implementing working capital loan guidelines and relaxed provisions for loan restructuring and provisioning. Earlier this fiscal year, NRB reduced the provisioning requirement for performing loans from 1.2% to 1.1% which has positively impacted bank profitability. Commercial banks in Nepal reported a combined net profit of Rs 22.29 billion in the first four months of 2024/25 - a 37.74% increase from Rs 16.18 billion during the same period last year.

The central bank recently amended provisions for overdue loans, allowing them to be classified under the "watchlist category”, which requires only 5% provisioning. Previously, loans had to be overdue for six months to qualify for an upgrade to the "pass loan category”. Under Nepal's current loan classification system, loans overdue for three to six months are categorised as substandard, six months to a year as doubtful, and more than a year as loss loans, with provisioning requirements of 25%, 50% and 100%, respectively.

"In India, banks have up to three years to set aside 100% provisioning for overdue loans. In Nepal, however, the requirement to auction loans quickly has created an oversupply of assets, particularly at a time when real estate activity is sluggish," KC of NMB Bank said.

(This report was originally published in  January 2025 issue  of New Business Age Magazine.)