Banks and financial institutions have now been given additional time to
comply with a stringent regulatory provision that compels them to set
aside five per cent of the total loan amount even if borrowers are
making timely principal and interest payments.
In a revised directive, issued today, Nepal Rastra Bank (NRB), the banking sector regulator, has said banking institutions, in the initial phase, need not allocate more than 1.5 per cent of the credit amount to cover risk created by loans classified as ‘watch list’. The deadline to meet this target is April 13.
From this date, the provision amount will increase by 0.5 percentage point every quarter until it reaches five per cent in mid-January 2017, says the directive, which is the first to be introduced since new Governor, Chiranjibi Nepal, took office.
“The revision made to the directive is an extremely positive step. This (has commenced the process of) strengthening bridge of confidence between NRB and bankers,” Vice President of Nepal Bankers’ Association Anil Shah said in a text message.
Issuing a directive on March 13 — six days before formal retirement of immediate past governor Yubaraj Khatiwada — NRB said it had added a new category of loan called ‘watch list’ under which provisioning of five per cent was a must.
Under this rule, banking institutions had to set aside five per cent of the total loan amount even if borrowers missed the loan repayment deadline by a day.
Also, five per cent of the loan amount had to be provisioned if the borrower maintained negative working capital, cash flow or networth for two consecutive years. This meant banking institutions were not exempt from setting aside funds even if principal and interest payments were being made on time.
Surprisingly, banking institutions were also told to make similar provisions if borrowers failed to clear payments of domestic raw material suppliers or if renewal process of loans, such as working capital, was delayed.
The central bank said these measures were introduced to prevent risks from building up in the banking sector, enhance shock absorbing capacity of banking institutions and ultimately protect the interest of depositors.
But bankers protested saying such a provision would only hit their profits and compel them to exert undue pressure on genuine borrowers to make loan repayments, which, they said, would dampen business sentiment.
Following this pressure, NRB, today, revised some conditions applicable to ‘watch list’ loans.
For instance, banking institutions now have to set aside additional funds only if borrowers miss loan repayment deadline by over a month. Likewise, loan-loss provision has to be made for short-term or working capital loans extended to borrowers who have been maintaining negative operating cash flow or networth for two consecutive years.
However, loans extended to borrowers, who have defaulted on payments at other banking institutions, should be covered by adequate provision amount. Also, loan-loss provision is mandatory for short-term or working capital loans, whose repayment deadline has been extended temporarily, without initiating the renewal process.
source:the himalayan times,2 April 2015
LINK
In a revised directive, issued today, Nepal Rastra Bank (NRB), the banking sector regulator, has said banking institutions, in the initial phase, need not allocate more than 1.5 per cent of the credit amount to cover risk created by loans classified as ‘watch list’. The deadline to meet this target is April 13.
From this date, the provision amount will increase by 0.5 percentage point every quarter until it reaches five per cent in mid-January 2017, says the directive, which is the first to be introduced since new Governor, Chiranjibi Nepal, took office.
“The revision made to the directive is an extremely positive step. This (has commenced the process of) strengthening bridge of confidence between NRB and bankers,” Vice President of Nepal Bankers’ Association Anil Shah said in a text message.
Issuing a directive on March 13 — six days before formal retirement of immediate past governor Yubaraj Khatiwada — NRB said it had added a new category of loan called ‘watch list’ under which provisioning of five per cent was a must.
Under this rule, banking institutions had to set aside five per cent of the total loan amount even if borrowers missed the loan repayment deadline by a day.
Also, five per cent of the loan amount had to be provisioned if the borrower maintained negative working capital, cash flow or networth for two consecutive years. This meant banking institutions were not exempt from setting aside funds even if principal and interest payments were being made on time.
Surprisingly, banking institutions were also told to make similar provisions if borrowers failed to clear payments of domestic raw material suppliers or if renewal process of loans, such as working capital, was delayed.
The central bank said these measures were introduced to prevent risks from building up in the banking sector, enhance shock absorbing capacity of banking institutions and ultimately protect the interest of depositors.
But bankers protested saying such a provision would only hit their profits and compel them to exert undue pressure on genuine borrowers to make loan repayments, which, they said, would dampen business sentiment.
Following this pressure, NRB, today, revised some conditions applicable to ‘watch list’ loans.
For instance, banking institutions now have to set aside additional funds only if borrowers miss loan repayment deadline by over a month. Likewise, loan-loss provision has to be made for short-term or working capital loans extended to borrowers who have been maintaining negative operating cash flow or networth for two consecutive years.
However, loans extended to borrowers, who have defaulted on payments at other banking institutions, should be covered by adequate provision amount. Also, loan-loss provision is mandatory for short-term or working capital loans, whose repayment deadline has been extended temporarily, without initiating the renewal process.
source:the himalayan times,2 April 2015
LINK
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