Reducing non-performing loans (LPLs) of the banks especially in the context of decreased capacity of micro, small and medium enterprises (MSMEs) to pay loan
Reducing NPLs of banks can be a challenging task. It is a known fact that the NPL is a complex process that requires a multi-faceted approach. Nepal Rastra Bank should work on developing and implementing effective strategies for addressing the root causes of NPLs. Our failure (both banks and regulatory institutions) is on the incompetence to identify early warning signals of potential NPLs.
In principle, the banks can collaborate with MSMEs to restructure, reschedule loans, largely by extending repayment period, reducing interest rate, converting the debt into equity or granting temporary interest-only payment options, all in the expectation that MSMEs would be able to pay loans. The other option is government can introduce support measures for MSMEs including credit guarantee schemes that can encourage banks to lend to financially distressed MSMEs with lower risk. Legal and regulatory framework improvements have also encouraged the resolution of NPLs, including faster insolvency and debt recovery processes. The time has come to revisit Asset Management Companies (AMCs) to purchase and manage NPLs to help banks clear their balance sheets and focus on new lending opportunities.
In many developing countries, banks have improved transparency in their lending process and shared credit information with other financial institutions through credit bureaus, which can reduce information asymmetry and help banks make informed lending decisions. Nepal needs to devise modality to creating secondary markets for NPLs, which can provide liquidity for banks and help them better manage their NPLs.
Nepal’s MSMEs desperately need debt counseling services to better manage their finances and improve their capacity to pay loans. There is increasingly higher degree of uncertainty especially on the survival of MSMEs indicating the need for additional financing to overcome financial difficulties. In South Asia we have experienced banks providing financing in the form of working capital loans, equipment loans, or other types of financing. With regards to providing access to training, technical assistance, and business development services, the regulatory institution can collaborate with non-profit organizations, Nepal Bankers Association (NBA), Confederation of Banks and Financial Institutions Nepal (CBFIN) and other stakeholders.
The central bank should now devise simple and workable policy to strengthen the credit risk management practices of the banks and financial institutions by improving their loan underwriting standards, conducting regular loan monitoring, and taking prompt action when borrowers are unable to pay their loans.
The advantage of implementing combination of such measures is the fact that banks can effectively manage their NPLs and support MSMEs in paying interest. The overall impact is the healthier financial ecosystem and support economic growth.