NRB turns stern on categorization of risk and loan loss provision for the borrowers of banks

Published On: August 29, 2023 10:00 AM NPT By: RAJESH KHANAL

KATHMANDU, Aug 29: Nepal Rastra Bank (NRB) has stepped up efforts to take stern measures against the categorization of risk and loan loss provision.

Issuing an amended unified directive on Monday, the country’s central bank has asked the banks and financial institutions (BFIs) to keep under close watch the borrowing institutions if the loans received by such organizations under a single heading is categorized as non-performing loans.

“If any one of the loans taken by an institution that had borrowed under more than one headings falls into the non-performing category, all other loans are also needed to be closely monitored,” reads the NRB directive.

A similar arrangement will be applied not only to loans taken by organizations but also to loans taken by individuals. “If the loan taken by one of the borrowers of a group is classified as non-performing, then the loans of other partners should also be analyzed and classified as non-performing.”

Similar provision will be applied even to the BFIs issuing credit to a group of individuals. If a loan taken by a borrower within a group is classified as non-performing, the other borrowers in the group who are directly affected by the borrower should be classified in the same non-performing category, according to the NRB.

For instance, if there are five debtors in a group and the loan received by one who has close connection to the first debt is considered substandard, then the loan received by the second debtor will also be kept in doubtful loan type. However, in case of the other three borrowers who are not directly affected by the first debtor, they might not be considered under the poor category.

Similarly, the central bank has also introduced strict measures to upgrade the loans classified in the non-performing category into the one under the good category. In case any loan is classified as non-performing loan, it can be upgraded to the good category only if the installment or interest of the loan is regular for six consecutive months. In such a situation, it can be upgraded to the good category and the loan loss system will be maintained accordingly.

According to the central bank, the revised provisions regarding the classification of loans and loss arrangements will come into force only from January 15, 2024.