The Nepal Rastra Bank (NRB) on Monday allowed banks and financial institutions (BFIs) to adjust the interests recovered in the fourth month of the current fiscal year in their first quarter balance sheets.

Amid slow recovery of loans, especially from real estate traders, banks had been demanding the extension of the interest payment period.

The Nepal Bankers’ Association (NBA) and other associations of financial institutions along with real estate traders had made a joint request to the central bank for such provision citing problems in loan recovery in the first quarter due to festivals.

Loan recovery from the real estate sector has been problematic, with realty transactions continuing to slump. According to the Department of Land Reforms and Management, revenue collection of five Valley-based land revenue offices plunged by 17.26 percent to Rs 345.07 million in the first quarter compared to the same period last year. Issuing a circular on Monday, NRB allowed BFIs to adjust the interest recovered within mid-November in their balance sheets of the first quarter (within mid-October) as ‘deferred cash’.

An NRB official said the central bank took such a decision considering the market demand. “This decision has been taken so as to provide stability to the financial system as per the bankers’ demand,” said NRB Spokesperson Bhasker Mani Gnawali.

NRB officials say although giving such flexibility is not a good practice, they had to take such measures to help banks maintain public faith in them.

Bankers have given mixed response to the central bank decision. Those who supported NRB decision said the move will provide the much needed stability to the financial system, whereas others criticised, saying that the move would only procrastinate the problem instead of solving.

Rajan Singh Bhandari, vice president of Nepal Bankers’ Association, said the NRB move would give consistency to the reporting of banks and prevent their balance sheet from deteriorating. “The extension will help BFIs limit the loan loss provisioning and maintain their profit in a better position,” he said.

However, NIC Bank CEO Sashin Joshi said the move is against the fundamental principle of prudent financing. “It is high time for us to see the real status of loan recovery and take a decision on whether to restructure or reschedule loans,” he said.

Finance Company Association President Nepal Rajendra Man Shakya echoed Joshi, saying the NRB should give a sustainable solution to the problems.

source: The Kathmandu Post, 15 Nov 2011