January 19:  Banks and financial institutions (BFIs) are likely to experience an increase in bad loans due to the shortage of lendable funds. BFIs used to avoid bad loans by collecting both capital and interest from overdraft loans, but recent problems of liquidity is expected to give rise to bad loans. 

While closing accounts, BFIs used to recover principal and interest of old loans by extending loans to individuals and institutional borrowers through overdraft. However, due to lack of liquidity, credit expansion has slowed down compared to the same period of the last fiscal year.

According to the Nepal Bankers Association, credit of commercial banks has increased by only Rs 59 billion in the current fiscal year. In the first quarter (as of mid-October), commercial banks had extended Rs 126 billion after closing the account.

As the credit expansion of banks has been affected, the recovery of principal and interest installment (EMI) has been affected. Anil Kumar Upadhyay, chairman of Nepal Bankers Association and CEO of Agriculture Development Bank, said, "Banks are not investing aggressively as they are focused on maintaining liquidity. When the banking system doesn't function properly, money from the market also doesn't come back to the system."

Banks and financial institutions are allowed to collect the principal and interest of the loan through overdraft. However, banks are not allowed to lend more than the overdraft limit to collect the installment, said NRB Executive Director Dev Kumar Dhakal.

Deposits of commercial banks increased by Rs. 123 billion in the current fiscal year while credit expansion increased by Rs 422 billion. According to the NRB, the credit of banks has gone to short-term and personal spending. Out of the credit extended by BFIs till mid-November of the current fiscal year, overdraft increased by 17.2 percent and demand and working capital loan increased by 5.4 percent .