Banks’ exposure to realty still high-level riskThe loan exposure of commercial banks to real estate and housing is still a high level risk, said the latest Financial Stability Report of Nepal Rastra Bank (NRB).
Citing the stress test results of 31 banks, the central bank report said that if 25 percent of the performing loans to the realty sector were to be directly downgraded to loss loans, the capital adequacy ratio (CAR) of 11 banks would sink below the required level of 10 percent. The CAR is the ratio of a bank’s core capital to its risk asset.
According to NRB, commercial banks have lent a whopping Rs 60.56 billion to the real estate sector as of first seven months of this fiscal.
NRB prescribed quarterly stress tests for commercial banks in 2011-12. The stress test is a risk management tool used to evaluate the potential impact on a firm of a specific event and movement components like earning, liquidity and capital.
As per the Financial Stability Report, a standard credit shock would push the CAR of 27 out of the 31 commercial banks below the regulatory minimum of 10 percent in mid-July 2013. The number of such vulnerable
banks was 22 in mid-July 2012 and 28 in mid-January 2013. Banks ability to endure shocks is tested by their CAR.
In the event of two large loans being downgraded from the performing to the substandard category, the CAR of two commercial banks would fall below the required level.
“The overall credit shock scenario revealed that the credit quality of banks has not improved as expected despite the various measures taken during the review period,” said the report. “Banks are likely to face a difficult situation in case of a slowdown in recovery, downgrading of non-performing loans to loss category and increase in provisioning.”
Himalayan Bank CEO Ashoke Rana said the tendency of ever-greening loans might have deteriorated credit quality of some banks.
“The Nepal Rastra Bank is scheduled to make a diagnostic review about the status of banks’ soundness from international experts, which will it make clear whether banks are at risk,” he said, adding some big banks have not increased their paid-up capital despite high business volume, which might have caused stress.
Though the liquid assets to deposit ratio of the total banking system as well as commercial banks has improved, the report said that more than half of the commercial banks may sink into a vulnerable situation if withdrawals of deposits reach 15 percent or higher. “The banks having a significant portion of institutional deposits may face a liquidity strain in case of withdrawals of deposits by their top institutional depositors,” said the report.
Meanwhile, the number of banks that may turn illiquid after deposit withdrawals of 2 and 5 percent of their total deposits for two consecutive days and of 10 percent for three consecutive days has dropped significantly to five in mid-July 2013 from 19 in mid-January 2013. The figure was five in mid-July 2012.
Standard withdrawal shock refers to the withdrawal of customer deposits of 2 percent and 5 percent in the first two days and 10 percent daily in the following three consecutive days. “The liquidity situation has improved since mid-January 2013, but not significantly compared to mid-July 2012,” said the report.
As per the report, in case of deposit withdrawals of 5 percent, 10 percent and 15 percent, the number of banks whose liquid asset to deposit ratio would fall below the regulatory minimum of 20 percent stands at one, four and 16 respectively.
As commercial banks still rely heavily on institutional depositors, large withdrawals by them will pose problems to them. If the top three and five institutional depositors were to withdraw their deposits, the liquid assets to deposit ratio of 14 and 21 commercial banks would dip below 20 percent.
However, NMB Bank CEO Upendra Poudel said banks are hardly facing stress related to liquidity as almost all of them have excess liquidity.
According to the NRB report, the stress test results reveal that all the commercial banks (excluding two state-owned banks) have maintained a CAR above the regulatory requirement when calibrated through their interest rate, exchange rate and equity price shocks. In case of a market shock, 29 out of the 31 commercial banks (excluding two state-owned banks) would be able to maintain their capital adequacy ratio above the regulatory requirement of 10 percent.
A combined credit and market shock test based on a scenario of 25 percent of the performing loans to the realty sector being directly downgraded to the substandard category of NPLs and a fall in the equity prices by 50 percent demonstrated that banks would not be affected.
However, if 15 percent of the performing loans deteriorated to substandard, 15 percent of the substandard loans deteriorated to doubtful loans, 25 percent of the doubtful loans deteriorated to loss loans and the equity prices fell by 50 percent, the CAR of four banks would remain above the regulatory minimum, the CAR of two banks would remain below 0 percent and the CAR of 25 banks would lie between 0 and 10 percent.
Poudel said as a majority of banks have CAR at 10-12 percent, just above the required level, a little rise in loans may bring down CAR below the required level. “For this, the paid-up capital should be increased,” he said.