Nepal Bankers’ Association (NBA) has asked member banks not to engage in ever-greening of loans by offering additional credit to borrowers to repay their loans.

After the central bank verbally warned against such a practice, the NBA wrote to its members not to do so.

The Nepal Rastra Bank (NRB) has said ever-greening of loans has posed risk to stability of the banking sector as it is an attempt to cover up bad or suspicious loans. It increases loan burden for borrowers, while the banks can show more profits in their balance sheets.

Mega Bank CEO Anil Shah confirmed he received the letter on Friday from the NBA secretariat, asking banks to refrain from extending extra loans to borrowers to enable them to repay interests and principals.

The NRB has termed the ever-greening of risk assets as a big challenge in the banking industry. The central bank, in its annual supervision report 2014, said a major chunk of the total risk assets is of “revolving nature”.

There is a practice of banks lending short-term loans on ad-hoc basis as well as extending dates and renewing facilities that ultimately help in meeting the debt service need of borrowers.

“The Nepalese banking industry has no practice of clean-ups for the revolving loans due to which the problems such as: maturity mismatch and ever-greening are still prevalent in the industry.”

NRB Deputy Governor Maha Prasad Adhikari said he had asked the NBA president on Friday not to engage in ever-greening of loans after some borrowers complained they were asked by banks to pay interest even by taking extra loans. “He (the NBA president) did a good job by issuing the letter to all the banks,” he said.

The banks are finding it hard to recover loans and interest from borrowers as a result of the closure of industries and trading activities due to long-running banda in Tarai and Indian trade embargo on Nepal.

“However, it does not mean banks should engage in practices that contradict banking principles,” said Sanima Bank CEO Bhuvan Dahal, adding also received the NBA circular. “When a borrower suffers, the bank also suffers.”

Meanwhile, the central bank said it was working to announce a relief package for industrialists and traders affected by the ongoing political crisis.

Adhikari said the NRB has been working on provisions such as extending loan-repayment deadlines, restructuring of project and avoiding penalty for the delay in repayment and giving banks relaxation in provisioning. “We have planned to introduce the measures between Dashain and Tihar,” said Adhikari.

Both bankers and the private sector have sought such measures from the central bank. “The businesses have really suffered and their loan repayment capacity has been affected,” said Adhikari.

“The impact of the current political chaos on businesses is bigger than that of the earthquake because earthquake didn’t hit Tarai, the main industrial belt of the country.”