Here is detailed article about loan classification and loan loss provision in Nepal. This article is updated version from the amendment of the latest monitory policy. Nepal Rastra Bank has amended the loan loss provision percentage for pass loan from 1.25% to 1.20%.
Advancing loan is the primary function of a bank. All credits are not collected on time. Nepal Rastra Bank issues unified directives for banks and financial institutions to follow the certain rules in order to minimize the risks. According to the unified directive 2078, Nepal Rastra Bank (NRB) has made a provision related to classification of loans of the bank and financial institution. The BFIs have to classify the loan into two major categories based on the overdue period of credit.
Based on the overdue duration, loan disbursed from the bank and financial institutions can be categorized into two categories. Performing Loan and Non Performing Loan. Bank and Financial Institution must aside the certain level of fund from the profit to minimize the risk. Nepal Rastra Bank strictly regulate the provisioning amount in the regular basis. Now, lets discuss the Loan Classification and Loan Loss Provision in Nepal in detail.
Pass Loan: Loans are categorized in the pass loan in the following conditions
Watchlist: Loan are categorized in the watchlist in the following conditions
NOTE : In the case of a new project, 3 fiscal years report will be counted after the project comes into operation.
Bank has to provision certain amount based on the loan category to minimize the possible loss made caused by the disbursed loan. The provisioning amount is taken from the profit of the bank. If the debtor will not repay the money, the bank has to maintain the loss from the provisioning reserve. Minimum Loan loss provisions imposed by NRB of different loans are as follows (As per Unified Directive 2078).
| Loan Classification | Meaning | Min. Provision |
|---|---|---|
| Pass Loan | Not overdue/Overdue up to 1 month | 1.20 % of loan |
| Watchlist | Overdue up to 3 month i.e 1-3 months | 5% of loan |
| Sub-standard | Overdue up to 6 months i.e 3-6 months | 25% of loan |
| Doubtful | Overdue up to 1 year i.e 6-12 months | 50% of loan |
| Loss | Overdue for more than 1 year | 100% of loan |
| Restructuring and Rescheduling | Changes made in loan timing (credit period) and terms and condition (other structure) in between | 12.5 % for Pass Loan 25% for substandard 50% for doubtful 100% for loss |
Nepal Rastra Bank has increased the threshold for provisioning on loan loss to up to 5% on the loan provided by the BFIs considering the COVID-affected businesses. Revising the Unified Directive, the central bank increased the loan loss provision by 0.3% on the credits that fall within ‘pass loans’ criteria issued by all A, B, and C class financial institutions. Now, BFIs have to maintain the loan loss provision at 1.25 % from 1 % earlier on such credits while preparing their annual financial statement.
Similarly, the NRB has also asked the BFIs to maintain provisioning of 5% of the loan amount in case the additional loans provided for the recovery of COVID-suffered businesses remain doubtful. The BFIs can extend the settlement period of the loans in this criteria by up to one year. via- My Republica
