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

Study Report:

Increasing Non-Performing Loans (NPAs) in Vehicle Financing

Designing Appropriate Tools for Reducing NPAs at Bank of Nepal Limited

Presented to:
Chief Executive Officer
Bank of Nepal Limited
Putalisadak, Kathmandu, Nepal

Presented by:
Surya Prasad Sharma 

Relationship Manager
Bank of Nepal Limited
Putalisadak, Kathmandu, Nepal

Date:
November 13, 2018

Table of Contents

Section	Page No.
1. Executive Summary	I
2. Introduction	4
3. Method of Study/Data Analysis	4
3.1 Questionnaire Method	4
3.2 Secondary Data	5
3.3 Trend Analysis	5
4. Major Findings	6
5. Future Course of Action/Strategies	6
6. Recommendation/Conclusion	7
7. Reference/Bibliography	8

1. Executive Summary

Bank of Nepal Limited is grappling with a rising tide of Non-Performing Loans (NPAs), particularly in its vehicle financing portfolio. As of November 2018, the NPA in this segment stands at Rs. 87.50 million, accounting for approximately 3.5% of the bank’s total exposure—a concerning figure given the sector’s significance. This report investigates the root causes of this increase and proposes actionable strategies to mitigate it.

Analysis reveals that the surge in NPAs, noticeable since 2016, stems from a mix of internal and external factors: escalating interest rates, poor transportation infrastructure, substandard vehicle quality, and delays in insurance claim settlements. These challenges have strained borrowers’ repayment capacity, pushing accounts into default. To address this, the bank must adopt a multi-pronged approach—revising pricing policies, enhancing borrower support, and strengthening risk management. This study aims to equip Bank of Nepal Limited with practical tools to curb NPAs and safeguard its financial health.

2. Introduction

Non-Performing Loans (NPAs) pose a persistent challenge to the banking sector, eroding profitability and threatening stability. For Bank of Nepal Limited, vehicle financing—a key business segment comprising 3-5% of total lending—has emerged as a hotspot for NPAs, particularly in High-Priority Loan Accounts (HPLA). The rising default rate not only impacts the bank’s balance sheet but also signals underlying operational and market vulnerabilities.

This report seeks to pinpoint the drivers of NPAs in vehicle financing and recommend tailored strategies to reverse the trend. By addressing both borrower-side issues (e.g., repayment capacity) and bank-side gaps (e.g., risk assessment), we aim to restore the health of this portfolio and enhance overall resilience.

3. Method of Study/Data Analysis

To understand the NPA surge, we employed a three-tiered approach: primary data from borrower surveys, secondary data from industry benchmarks, and trend analysis of historical performance. This methodology provides a comprehensive view of the problem and its evolution.

3.1 Data Analysis: Questionnaire Method

From a pool of 200 HPLA clients, 20 were randomly selected for a survey to uncover reasons for delayed payments, NPA triggers, and borrower expectations. The table below summarizes their responses:

No. of Participants	Reason of NPA	How It Can Be Reduced/Expectations
10	- High interest rates	- Reduce interest rates
	- Poor infrastructure & unexpected breakdowns	- Finance branded vehicles
	- Delay in insurance claim settlement	- Establish a banca-insurance department
5	- No buy-back guarantee with suppliers	- Arrange buy-back guarantees
	- No loan repayment schedule provided	- Provide EMI schedules upfront
	- High operating costs
5	- Unaware of payment dates	- Share repayment schedules
	- High interest rates	- Offer subsidized rates & penal waivers for settlement
	- Poor roads & frequent breakdowns	- Expedite insurance claim settlements

Insights: The majority (50%) cited high interest rates as a primary default driver, compounded by poor road infrastructure and repair costs. A quarter of respondents highlighted the lack of repayment schedules, reflecting a communication gap. Others pointed to inadequate financial literacy, with some unaware of NPA classification after 30 days of default. This underscores the need for borrower education and proactive engagement.

3.2 Data Analysis: Secondary Data

The table below benchmarks Bank of Nepal Limited’s NPA against industry standards:

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 (Bank of Nepal)	3.5%
International Standard of Overall NPA	5%
Highest NPA in Nepal	8%
Lowest NPA in Nepal	0.25%
Average Interest Rate of Banks	12%
Source: A. Adhikari (2018), Sectorial Financing of Banking and Non-Performing Loan, Kathmandu Economic Forum, Rameshwori Press

Insights: While the bank’s overall NPA (1.5%) is below the national average (4%), its vehicle financing NPA (3.5%) exceeds the bank’s norm and trails the sector average (5%). This suggests a specific vulnerability in this portfolio, warranting targeted intervention.

3.3 Trend Analysis: NPA vs. Interest Rates

The table below compares Bank of Nepal Limited’s NPA trends with three peer banks, alongside interest rate movements:

Year	Bank of Nepal NPA Ratio (%)	Peer Banks NPA Ratio (%)			Avg. Interest Rate (%)	HPLA Rate (%)	Avg. NPA in Nepal (%)
		NP Bank	KLC Bank	RC Bank
2014	1.2	1.25	1.10	1.11	9	10	1
2015	1.25	1.27	1.17	1.18	10.5	11.3	1.12
2016	1.5	1.30	1.55	1.39	11	12	1.35
2017	2.05	2.1	2.5	2.12	12.5	12.5	2
2018	3.5	3.53	3.2	3.37	12.78	13.5	3
Sources: Respective banks’ annual reports

Insights: A clear correlation emerges—rising interest rates parallel NPA increases. From 2014 (9% avg. rate, 1% NPA) to 2018 (12.78% avg. rate, 3% NPA), higher borrowing costs have strained repayment capacity, with Bank of Nepal’s HPLA rate peaking at 13.5% in 2018, driving its NPA to 3.5%.

4. Major Findings

• Interest Rate Sensitivity: NPAs rise with interest rates, reflecting an inverse correlation as borrowing costs erode affordability.
• Pricing Vigilance: Inconsistent rate adjustments have exacerbated defaults, highlighting the need for cautious pricing strategies.
• Financial Literacy Gap: Borrowers lack awareness of repayment schedules and NPA implications, necessitating education initiatives.
• Insurance Delays: Slow claim settlements hinder recovery, amplifying financial stress on borrowers.
• Infrastructure Woes: Poor roads increase vehicle breakdowns and maintenance costs, a systemic issue beyond the bank’s control.
• Supplier Gaps: Absence of buy-back agreements leaves the bank exposed when borrowers default.

5. Future Course of Action/Strategies

The NPA surge in vehicle financing stems from high interest burdens, infrastructure challenges, and operational inefficiencies. To reverse this trend, Bank of Nepal Limited should adopt the following strategies:

• Incentivize Timely Payments: Offer a 0.50% interest rebate for six months of consistent payments and a 1% subsidy after one year of regularity.
• Ease Settlement Barriers: Waive the 3% penal interest for fully provisioned accounts settling dues, encouraging resolution.
• Engage Borrowers: Hold quarterly meetings to address concerns and reinforce repayment discipline.
• Selective Financing: Prioritize branded vehicles with proven durability to minimize breakdown risks.
• Streamline Insurance: Partner with reputable insurers and establish a banca-insurance team for swift claim processing.
• Secure Supplier Commitment: Implement tripartite agreements with borrowers and dealers, including a buy-back clause if defaults exceed three months.

These measures balance borrower relief with risk mitigation, aiming to shrink the Rs. 87.50 million NPA burden.

6. Recommendation/Conclusion

While NPAs are an inherent risk in banking, their impact can be curtailed through proactive tools and policies. This study reveals that vehicle financing NPAs at Bank of Nepal Limited are driven by controllable factors—high interest rates, poor communication, and weak risk buffers—alongside external pressures like infrastructure.

We recommend the management implement the proposed strategies: subsidize rates for consistent payers, waive penalties for settlements, enhance borrower literacy, and forge supplier and insurance partnerships. These steps will not only reduce the current 3.5% NPA in vehicle financing but also fortify the bank’s portfolio against future shocks. Swift action is critical to protect profitability and maintain stakeholder trust.

7. Reference/Bibliography

• Adhikari, A. (2018). Sectorial Financing of Banking and Non-Performing Loan. Kathmandu Economic Forum, Kathmandu: Rameshwori Press.
• Annual Reports of Bank of Nepal Limited and Peer Banks (2014–2018).