Impact of Stressed Assets on Banking System: Insights by Former Banker Parshuram Kunwar Chhetri

Impact Stressed Assets
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25 June 2024, Kathmandu

The banking sector is facing significant challenges due to the growing volume of stressed assets.

Impact of Stressed Assets on Banking System

A detailed analysis reveals the critical impact these assets have on profitability, capital adequacy, and liquidity of banks, which ultimately affects their lending capabilities and, by extension, the economic growth of the country.

Defining Stressed Assets:

Stressed assets encompass a range of financial concerns, including restructured loans, rescheduled loans, watchlist accounts, non-performing assets (NPA), and non-banking assets (NBA). The increasing volume of these assets is alarming for the financial stability of banking institutions.

Current Statistics:

Non-Performing Assets (NPA): The gross NPA has surged from 1.81% in December 2076 (Nepali calendar) to 3.98% by December 2080. This significant increase indicates a deterioration in the quality of assets held by banks.

Loan Loss Provision: The cumulative loan loss provision has increased from NPR 69 billion (2.11% of total loans) to NPR 233 billion (4.55% of total loans), marking a growth of 237.68% against a loan growth of 56.82%.

Risk Provisions: The total provision for risk has seen a sharp rise, from NPR 11.79 billion (0.36% of total loans) in 2076 to NPR 45.78 billion (0.89% of total loans) in 2080.

Economic Implications:

The growing volume of stressed assets restricts banks’ ability to lend, impacting economic activities. As banks become more conservative in their lending practices due to reduced profitability and tighter capital adequacy ratios, overall economic growth slows down.

Capital Adequacy and Profitability:

Capital Adequacy: Core capital to risk-weighted assets (RWA) has declined from 11.55% in 2076 to 9.81% in 2080. Total capital adequacy also saw a decrease from 13.59% to 12.61% during the same period.

Profitability: The return on closing equity (annualized) dropped significantly from 12.59% in 2076 to 7.68% in 2080, reflecting the decreased profitability of banks under the burden of increasing stressed assets.

Liquidity Concerns:

Liquidity ratios have also been affected, with the ratio of cash and bank balances to total deposits falling from 9.50% to 6.88%. However, investment in government securities to total deposits increased from 11.13% to 18.47%, indicating a shift towards safer assets.

Trends and Projections:

The trend analysis shows a continuous increase in NPA and loan loss provisions over the years, with gross NPAs for commercial banks standing at 3.89% as of December 2080. Special loan loss provisions have also seen a substantial rise, highlighting the banks’ growing concerns over asset quality.

The situation of stressed assets poses a significant risk to the banking system. To mitigate this, there is an urgent need for enhanced monitoring, better risk management practices, and supportive regulatory frameworks. Addressing these issues is crucial for the health of the banking sector and the overall economy.

Parshuram Kunwar Chhetri: Impact of Stressed Assets on Banking System


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