Hi !
As all of you know, bank collects the funds from savers in the form of deposit and lends it to another in form of loans and advances.
In other words, it collects funds from surplus groups and lends it to the deficit groups. This helps to balance the entire financial economy.
In general, loans and advances may be categorized into :
- Secured Loans and Advances
- Unsecured Loans and Advances
- Demand (Short-Term ) Loans and Advances
- Long Term Loans and Advances
- Subsidized Loans and Advances
- Concessional (Soft ) Loans and Advances
- Personal Loans and Advances
- Commercial (Business) Loans and Advances
Different Bank and Financial Institutions may have different kinds of loans and advance categories with different names. However, their scope will fall under above categories.
The central bank of Nepal has clearly directed its licensed Bank and Financial Institutions to classify its loans and advances on the basis of its time period. The expiry of the deadline of repayment of the principal as well as interest serves as a basis for categorizing the loans and advances.
Under unified directive number 2, issued as on bhadra 2075 of Nepal Rastra Bank, the entire loans and advances of all the Bank and Financial Institution of Nepal are to be classified under five categories. They are as follows:
1. Pass :
- It refers to such loans and advances that are not overdue.
- It also includes all such loans and advances that are overdue by a period up to 3 month.
- The minimum provision that should be made for this category is 1%.
- They are known as "Performing Loan".
2. Watch List :
- It refers to such loans and advances that is in preview of 'Pass' category embarked with certain criteria. (for watch list conditions/criteria please read the tutorial note ).
- The minimum provision that should be made for this category is 5%.
- They are also the part of "Performing Loan ".
3. Sub-standard :
- It refers to loans and advances that has been overdue by a period of minimum 3 month and maximum up to 6 month.
- The minimum provision that should be made for this category is 25%.
- They are known as "Non-Performing Loan ".
4. Doubtful :
- It refers to loans and advances that has been overdue by a period of minimum 6 month and maximum up to 1 year.
- The minimum provision that should be made for this category is 50%.
- They are the part of "Non-Performing Loan ".
5. Loss :
- It refers to loans and advances that has been overdue by a period more than 1 year.
- The minimum provision that should be made for this category is 100%.
- They are the part of "Non-Performing Loan ".
Therefore, all the licensed Bank and Financial Institutions has to classify their entire loans and advances into above five categories and make specified provisions thereon. However, this information should be quarterly reported to the Central Bank under the prescribed format along with financial statements.
Tutorial Note:
Under following circumstances, the central bank has directed its licensed bank and financial institutions to keep their loans and advances under watch list category :
- loans and advances that is due for 1-3 month
- short term loans or loans against paid up capital, whose period is temporarily increased without renewal.
- The debtor who fall under non-performing loan category in any other bank and financial institutions.
- Even though the principal as well as interest is timely paid, the lending bank and financial institutions must consider following :
- Is the loan passed to such debtor who is constantly bearing loss for two years ?
- Do the firm, company or institution has negative net worth ?
If the answer to the above two question is positive then it must be kept under watch list category.
However, in case of project based loan, the above criteria must be checked only after production process has begun.
- Consortium financing (loan amount equal to 1 arab or more ) that has not been converted into multi-Banking loans.
- when Nepal Rastra Bank monitors the debtor and finds out - that the cash flow or the project operation of the debtor is weak, then the central bank may direct such bank and financial institutions to keep such loans and advances in its watch list category.
