Nabil Bank Chief Executive Officer Manoj Gyawali has clarified that the establishment of an Asset Management Company will not magically resolve all the issues in the banking sector. He argued that the perception that such companies will immediately buy up all non-performing assets, leaving banks to sit back without any worries, is entirely incorrect.
According to Gyawali, an Asset Management Company works by analyzing the business feasibility of troubled companies, improving their financial management and cash flow, and restructuring or remodeling them. If necessary, the management company can even take over the operations of such businesses to restore their viability.
No bank is operating under the assumption that an Asset Management Company will simply purchase all their bad assets to relieve them of their burden, and such a company cannot acquire all assets anyway, Gyawali said. He warned that if the government adopts restrictive policies like detention and heavy crackdowns instead of remaining flexible, the situation could become even more complicated.
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Nepali Banks Face Challenges But Remain Strong
Gyawali strongly rejected the narrative that Nepali banks are collapsing or ruined due to the rise in non-performing assets. While acknowledging that the increase in bad loans from the previous 1.5 percent or 1.67 percent to 5.6 percent is challenging, he pointed out that this rate is still the second lowest in the South Asian region.
To put things into perspective, he shared regional data showing that Pakistan has a bad loan rate of around 10 percent, Sri Lanka exceeds 10 percent despite slow recovery after its economic crisis, and Bangladesh has reached nearly 30 percent due to political unrest and a year and a half of instability. Compared to these nations, Nepal is in a much better position.
He explained that under the Income Tax Act, non-performing assets up to 5 percent are eligible for deduction. Since the central bank also sets various facilities within this limit in its circulars, the 5 percent mark is often perceived as a major threshold of concern.
Strict Central Bank Regulations Protect Deposits
Gyawali asserted that Nepal Rastra Bank has an exceptionally strict loan classification and reporting system. He noted that Nepali banks are required to maintain a 1 percent provisioning even for regular, active loans, which was briefly increased before being brought back to 1 percent. This ensures that banks maintain strong financial cushions. He emphasized that the possibility of depositors losing their money or suffering financial losses is extremely far-fetched at present.
Three External Reasons Behind Rising Bad Loans
While admitting that banks are not flawless and have made mistakes in some areas, Gyawali pointed out three major external factors responsible for the recent rise in non-performing assets.
First, in the past, when borrowers faced difficulties paying back their loans, they would manage funds through cooperatives, exchange checks, or borrow from friends to temporarily clear their bank dues and keep their credit cycle running. Following the widespread crisis in the cooperative sector, this option has been completely shut down.
Second, a severe trust deficit has gripped the market. Currently, people are hesitant to trust others even for small sums like 50,000 rupees, which has brought personal lending and informal financial transactions to a complete standstill.
Third, the slump in the real estate market has blocked the path for borrowers to regularize their loans by subdividing or selling their land. Due to the massive migration of young people abroad, the demand for land has dropped to its lowest point in history.