Increasing Non-Performing Loan (NPA’s) of Vehicle Financing-Case Study (Presentation to ALC Training on Professional Writing Training)

 

Study Reports of

Increasing Non-Performing Loan (NPA’s) of Vehicle Financing

Designing of Appropriate Tool for Reducing the NPA of Bank of Nepal Limited

 

 

Presented to

Chief Executive Officer

Bank of Nepal Limited

Putalisadak, Kathmandu

Nepal

 

 

Presented by

Relationship Manager

Bank of Nepal Limited

Putalisadak, Kathmandu

Nepal

 

 

 

November 13, 2018

1.     Executive Summary                                                                         I

Bank of Nepal Limited has witnessed a significant amount of Non-performing loan (NPA) especially in vehicle loan financing. Total NPA of the bank under vehicle financing is Rs.87.50 million which is approximately 3.5% of total bank’s exposure. Therefore, this report tries to find out the reason of increasing bad debt of vehicle loan. Similarly, through this study it is also expected to find out the appropriate mechanism and strategies to be implemented by the bank so that increasing size of NPA can be reduced.

Upon review, it has been ascertained that NPA of the Bank has started to increase since 2016 and is due to different internal as well as external factors including poor transportation infrastructure, changing interest rates, quality of financed vehicles & issue of insurance claim etc. Thus, bank should address the above issues as early as possible so that increasing NPA’s can be reduced.

Table of Content

Particular                                                                                                                    Page No.

1.    Executive Summary                                                                                                          I

2.   Introduction                                                                                                                      4

3.  Method of Study/Data Analysis                                                                                        4

            3.1 Data Analysis: Questionnaire Method                                                                   4

            3.2 Data Analysis: Secondary Method                                                                         5

            3.3 Data Analysis: Trend Analysis                                                                              5         

4. Major Findings                                                                                                                    6

5. Future Course of Action/Strategies                                                                                                6

6. Recommendation/Conclusion                                                                                             7

7. Reference/Bibliography                                                                                                      8                                                                                                                                                                                 

 

 

 

2.     Introduction

One of the pertinent issues in the banking industry is managing bad debt and non-performing loans (NPA). Because of such NPA’s, Banks are poised to report ample amount of loss resulting in negative growth on their balance sheets. Vehicle financing is one of the major sectors of bank’s business and is approximately 3-5% of the total bank’s financing is booked under this sector. However, because of the different inherent issues on borrower side as well as the bank’s, in recent days we are witnessing high levels of NPA in vehicle financing (HPLA).

Identifying the reason of increasing NPA’s in vehicle financing and reducing the same is possible by introducing/implementing different tools, techniques and strategies. Therefore, this reports tries to ascertain reason of increasing NPA especially in HPLA sector and identify the necessary measures to reduce such NPA’s.

3.     Method of Study

Out of 200 HPLA client of the bank, 20 HPLA clients have been randomly selected for  obtaining the reason of un-time payment of HPLA installment, reason of NPA on vehicle loan (HPLA) and their expectation from the banks to streamline their default account. Following table depicts the response of respondent.

3.1 Data Analysis: Questionnaire Method

Question: What do you think why the bank poised to book high NPA in HPLA? How it can be reduced and what is your expectation from the banks?

Number of Participant	Reason of NPA	How it can be reduced/your expectations
10	·     High Interest Rate ·     Poor Infrastructure and unexpected break-down ·     Delay in insurance claim settlement	·      Reduce the interest rates ·      Financing in branded vehicle ·      Establishing banks own Banca-insurance department
5	·     No Buy-Back Guarantee Arrangement with vehicle supplier ·     Not providing the Loan Repayment Schedule	·      Buyback guarantee arrangement ·      Upfront information of EMI Schedule ·      High operating cost
5	·     Un-aware of the payment date ·     High Interest Rate ·     Poor Road and regular Breakdown of the vehicle	·      Repayment Schedule ·      Providing subsidized interest rate along with penal waiver incase borrower come to settle the dues ·      Insurance claim settlement

 

 

Most of the respondent viewed major reason of NPA increment is due to upward revision of interest rate. Secondly, poor infrastructure & road facilities and repair and maintenance cost has also led borrower to delay in payment of respective installment etc. Further, out of 20 respondents, 5 respondents viewed installments delay is because of unavailability of loan repayment schedule (not having proper communication of the schedule). While another 5 are un-aware of loan classification (i.e. categorization of account to NPA in-case they default the loan), hence they intentionally delayed the payment more than 30 days of its due date. This shows there is need of financial literacy program to be conducted to Bank’s customers.  

3.2 Data Analysis: Secondary Data

Particular	Ratios
Overall NPA in Banking in Nepal	4%
NPA of Bank of Nepal Limited	1.5%
Overall NPA in Vehicle Financing in Nepal	5%
NPA in Vehicle Financing in Bank of Nepal Ltd	3.5%
International Standard of overall NPA	5%
Highest NPA in Nepal	8%
Lowest NPA in Nepal	0.25%
Average Interest Rate of the Banks	12%

(Source: A. Adhikari (2018) Sectorial financing of Banking and Non-Performing Loan, Kathmandu Economic Forum, Kathmandu, Rameshwori Press)

3.3 Trend analysis: NPA vs Interest rate, Comparative analysis

Bank of Nepal Limited		3 Peer Banks				Average interest rate of the banks (%)	HPLA rate of Bank of Nepal (%)	Average NPA of Banks in Nepal
Year	NPA Ratio %	Year	NP Bank	KLC Bank	RC Bank
			NPA Ratio %
2014	1.2	2014	1.25	1.10	1.11	9	10	1
2015	1.25	2015	1.27	1.17	1.18	10.5	11.3	1.12
2016	1.5	2016	1.30	1.55	1.39	11	12	1.35
2017	2.05	2017	2.1	2.5	2.12	12.5	12.5	2
2018	3.5	2018	3.53	3.2	3.37	12.78	13.5	3

Sources: respective banks annual reports

Above table clearly states that higher the interest rates more the default recorded in vehicle loans. In 2014, average interest rates of the banks in Nepal were 9% p.a. while average NPA in banking was 1% where Bank of Nepal’s portion of NPA was 1.2%. As there have been significant increments in interest rate on HPLA in subsequent years, rate of average NPA of the banks also jumped-up from 1% to 3% right after 2014 to 2018.

 

 

4.     Major Findings

·         Interest rates and NPA’s have direct but inverse correlation

·         Bankers should have more vigilant during revision and fixation of interest rates

·         Providing Financial literacy, awareness to the borrower or client is still one of the major obstacles of banking fraternity

·         Absence of prompt insurance claim settlement is one of the major challenges of vehicle financing 

·         Buy-back agreement with vehicle supplier may have positive impact on early recovery default vehicle loan

·         Poor road infrastructure is again deadlock of the countries transportation business.

 

5.       Future Course of Action/Strategies

Through above empirical studies, it has been found that major portion of NPA’s reported under HPLA Loans was because of decreased purchasing power capacity of the borrower  created through high interest obligations. Similarly, another component that helped to increased Bank’s NPA is regular breakdown of the vehicle due to poor road infrastructure, excessive repair and maintenance cost etc. Similarly, delay in insurance claim from Insurance companies is also another factor that helped to increase banks NPA’s.

As such, considering the above circumstances, we banks should follow and come up with new strategies to reduce the excessive NPA currently reported under vehicle loan.

Ø  Providing rebate on interest rate by 0.50% if paid on time since last six months

Ø  Offering 1% subsidy on interest rate if account installment payment is regular since last one year

Ø  Waiving penal  interest (additional 3%) in-case 100% provisioned account intend to fully settle the loan

Ø  Quarterly meeting with the borrower, conducting the meeting on regular basis

Ø  Financing of branded and vehicles that are already have proven track record or low repair and maintenance cost

Ø  Tying up with reputed and fast claim settlement insurance company. Separate banca-insurance team needed to be established for proper supervision and monitoring of vehicle insurance.

Ø  Tripartite agreement shall be signed amongst bank, borrower and vehicle supplier (dealer) before purchase/financing of the vehicle on which vehicle supplier shall guarantee to make payment of the banks installment if become due more than 3 months. Similarly, buy back guarantee agreement shall be signed with vehicle supplier so that they shall re-purchase the said vehicle incase primary borrower unable to operate the vehicle and loan could not be settled therein.

 

6.     Recommendation/Conclusion

NPA’s are in-evitable in Banking industry however it can be reduced significantly if appropriate tools and mechanism is to be followed during, on and after sanctioning of the loans. Therefore, based on this study, we recommended management to implement tools and methods as stated above (i.e. on further course of action/strategies) which includes subsidizing interest rates to the borrower, motivating them through financial literacy programs and making arrangement of buyback guarantee with supplier in-case of defaults and establishing prompt insurance claim mechanism through our Banca-insurance department.

 

 

7.     Reference/Bibliography

Adhikari (2018) Sectorial financing of Banking and Non-Performing Loan, Kathmandu Economic Forum, Kathmandu, Rameshwori Press)