The NRB has now told banks and financial institutions (BFIs) to make provisioning of five percent of the loan category of “watch list” gradually over the next two years until mid-January 2017. Before the revision, the BFIs were to make the provisioning from mid-April 2015.

The BFIs will now have to make provisioning of 1.5 percent in mid-April and 2 percent in mid-July, and increase the provisioning by 0.5 percentage points every quarter until mid-January 2017, according to the new directive.

The central bank added “watch list” as the new category of loan to discourage growing practice of borrowers not utilising the loans in projects where they were supposed to go. In fact, the central bank found some sugar mills were not utilising loans taken from banks for the purpose of the mill operation and they were also not paying sugarcane farmers. The NRB suspected the borrowers might have siphoned off the money from the country.

A senior NRB official said the directive was revised to give BFIs some time to adjust their provisioning after they complained that they were not mentally prepared for a 5 percent provisioning. “We relaxed the provision but continued the ‘watch list’ to ensure the BFIs make provisioning based on the risk,” said the official.

The bankers termed the revision “positive but inadequate”. “Nepal Bankers’ Association (NBA) had suggested the central bank not to implement the watch list-related directive this fiscal year,” said NBA President Upendra Poudyal. “Gradual implementation is obviously a positive step, but it has still failed to address our concern about financial statement-related issues of the borrowers.”

The bankers say borrowers do not maintain balance-sheets in standard format, so the banks are forced to make provisioning of much of the loans under the ‘watch list’ despite being good loans.  

The central bank has also revised the criteria of the “watch list”. As per the new criteria, any loan that has crossed the repayment deadline by a month will come under the “watch list”. Also, short-term loans and operating loans whose deadline has been extended temporarily without renewal should be categorised under “watch list”.

Likewise, BFIS have to categorise the loans extended to a borrower whose loans from another bank have turned non-performing, and loans provided to a firm whose net worth and cash flow have remained negative for the past two years despite regular payment of principal and interest, under the “watch list”.