Financial sector faces Rs26b business losses

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    KATHMANDU, JUN 21 – The banking sector is expected to see modest deterioration in the loan portfolio quality, impacting the solvency of banks and financial institutions (BFIS) due to their credit exposure to residential buildings and real estate that suffered massive damage by the April 25 earthquake , according to the Post Disaster Needs Assessment (PDNA).

    The report says the financial sector, including both banking and insurance, incurred a business loss of Rs26 billion (most losses related to banking).

    The temblor damaged owners’ occupied dwellings and public assets worth Rs303 billion—which is more than 58 percent of total damage—and economic activities in the real estate sector too slumped massively.

    Nepal Rastra Bank (NRB), which helped in PDNA process to ascertain the impact of theearthquake on banking sector, however, ruled out any systemic risks to the banking sector.

    NRB Spokesperson Min Bahadur Shrestha said moderate deterioration in the loan portfolio does not mean all the loans extended to quake-affected projects will be defaulted.

    “There are some projects which can be rescued by extending the repayment deadline. Some loans should be restructured and some should be refinanced,” he said. “Some hotels, schools and housing may require refinancing.”

    The growth in the real estate sector is expected stand at just 0.8 percent this fiscal year against an expected 4.8 percent before the earthquake , according to National Account Estimate published by Central Bureau of Statistics (CBS).

    The flow of credit is also expected to be affected, the PDNA report says. The impact on credit flow has already been seen, with commercial banks extending just Rs3 billion credit compared to their deposit mobilisation of Rs56 billion during the period between May 1  and June 5.

    The insurance sector has received compensation claims of over Rs16 billion. A large share of the claims has been re-insured abroad, but local liability remains substantial, the report says.

    Considering the financial burden Nepali insurance companies may have to bear for compensation, the Insurance Board has said it would consider recommending the government to offer soft loans to insurers if needed.

    Tourism has been adversely affected, with nine in every 10 foreign arrivals cancelled in the aftermath of the quake that hit the country in the first of two major tourist seasons.

    The main shock and subsequent aftershocks damaged seven out of 10 World Heritage sites of the Kathmandu Valley and affected popular trekking routes.

    As a result, tourism is expected to bear a business loss of Rs62 billion, the highest business loss any sector suffered, over the next two years. “Based on low and no seismic activities over the coming months, tourism can rebound somewhat by autumn and strongly by next spring’s climbing season,” the report states.

    As far as the impact on agriculture is concerned, the harvest of rice and maize was already disappointing and what the earthquake did additionally was it destroyed the stockpiles of stored grains and devastated the livestock sector which account for 23 percent of the value addition in agriculture, according to the report.

    The CBS has downgraded the growth of the sector to 1.8 percent from the initially projected growth of 2.2 percent.

    In the social sector, education is expected grow slowly due to disruption spanning several weeks, and health services are expected to grow more than initially expected  due to medical services needed for earthquake victims, although its contribution to the GDP is just 1.7 percent.

    As for manufacturing industries, the report says the quake didn’t directly affect the industries because they are based in the southern plains. They, however, faced losses due to falling national demand and fleeing workers.

    “In the next fiscal year, labour demand for demolition, clearing of debris and reconstruction of destroyed and damaged dwellings and other physical infrastructure will grow,” says the report. “This will increase the demand and earnings for skilled and unskilled labours in ancillary industries.”

    In the power sector, electricity generation has not dripped notably after the earthquake , although about 115MW hydropower facilities are estimated to have sustained damages, according to the report.

    All the transmission lines are in operation, while about 800km of distribution lines at different voltage levels and 365 transformers at different capacity are out of service, it said. Various generation plants having combined capacity of 1,000MW were partly damaged.

    One of the biggest concerns for the economy is the earthquake has affected revenue collection adversely this fiscal year, and will have an impact on the collection in the next fiscal year too.

    The government has admitted the targeted revenue collection of Rs423 billion won’t be met this year as the estimate has been revised at Rs390 billion.

    “This will set up much lower base for next fiscal year, where the target is now to raise only between Rs460 billion and 480 billion, against the initial projection of Rs512 billion,” the report says. “Of the five major sources of revenue, custom and non-tax revenues have seen the largest drop in collection.”

    Source : eKantipur