Kathmandu. After the devastating floods in Bhotekoshi, the pressure on banks and financial institutions to extend loans has increased as it is seen that a large amount of money will be needed for reconstruction. However, when the floods are putting the bank’s investment at risk, the situation of issuing more loans has made it challenging for the banks to manage the risk.
The government has estimated that more than Rs 7.25 trillion will be required for the reconstruction of flood-affected areas. Reconstruction of damage to houses, businesses, hydropower projects, roads and other infrastructure requires huge investment, so a significant amount of credit has to be mobilized through the banking system. However, about Rs 2.43 billion of loans already issued by banks and financial institutions in the flood-affected areas are at risk.
The houses and businesses of some borrowers as well as the property mortgaged in the bank have been destroyed. As some borrowers are not able to come in contact, the recovery of loans will become more complicated. This has put the banks under double pressure. On the one hand, there is a need to manage the loans of old borrowers affected by the floods, and on the other hand, additional loans have to be disbursed in the affected areas for reconstruction.
At present, the demand for loans in the banking system has not increased as expected. Despite the low interest rates and more than Rs 13 trillion liquidity in the system, the private sector has not shown enthusiasm to take new loans. In such a situation, bankers say that although post-flood reconstruction can increase the demand for loans, it will not be easy to automatically convert it into bank credit expansion.
If only about 5 percent additional loans can be mobilized for the reconstruction of flood-affected areas, then the credit expansion of the banks can increase significantly. The credit expansion of the banks, which is currently around 6 percent, is likely to increase by another 4-5 percent to reach double digits. However, this will require a clear plan for reconstruction and a policy arrangement for mobilizing bank loans.
The government should create an environment for the mobilization of bank loans by setting the priorities of the affected areas and reconstruction. Trying to mobilize the necessary loans for reconstruction only on the basis of general market demand may not yield the desired results.
Another major challenge for banks after floods is non-performing loans. If the borrower is unable to repay the loan if the collateral of the bank is destroyed, the loan recovery process will become more complicated. Bankers say that this can increase the non-performing loans and also increase the non-banking assets of the banks.
As the non-performing loans of banks are already above five and a half percent, the risk of banks will increase further if they have more loans due to floods. In this situation, the risk bearing capacity of banks will become important as new loans have to be issued for reconstruction.
Therefore, the issue of relief to the flood-affected borrowers should not be seen only in terms of the flow of new loans. There is a need to move forward by coordinating the new loan flow for restructuring the old loan, the re-evaluation of the mortgage, the process of insurance claims and the reconstruction.
There is no shortage of investment money in the banking system at present. The problem is to convert it into a loan to reduce the risk. If the government can set the priority of reconstruction, facilitate the banks and financial institutions in the mobilization of loans and come up with a clear policy on the management of the existing loans of the affected borrowers, then the post-flood reconstruction can become the basis for increasing the demand for credit. However, if the old loan of the bank is at risk, the policy of increasing only new loans can increase the pressure on the banking sector.
Therefore, bankers say that the challenge in post-flood reconstruction is not only to provide loans but also to expand new loans by saving the old loans that are at risk.
