What it is
This is where most of a bank's money is. Depositors give the bank money; the bank lends it out and earns interest. That interest is its main income.
The figure is shown net: total loans minus the 'impairment allowance', the money set aside for loans that may go bad.
A loan is an asset for the bank because the borrower owes it money. It becomes a problem only when the borrower stops paying. That is why loan quality matters as much as loan size.
How it is calculated
Gross loans and advances to customers − impairment allowance (loan loss provision) = net loans and advances.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's loans and advances to customers stood at Rs 46,031.78 crore at the end of FY 2082/83 Q4, 62.65% of total assets. Deposits were Rs 59,255.94 crore.
What good looks like
Steady growth roughly in step with deposits is normal. Growth much faster than the sector can mean the bank is taking more risk. Pair this line with the gross NPL ratio: size tells you scale, NPL tells you quality.
Watch out
- A bigger loan book means more interest income but also more that can go wrong.
- The number is after provisions; the gross figure is in the notes.
- Loan growth late in the fiscal year can be pushed to meet targets; look at the whole year.
In Nepal
NRB classifies every loan as pass, watch list, substandard, doubtful or loss, and requires a provision for each class. NRB also caps how much a bank can lend relative to deposits through the credit-to-deposit ratio (90% ceiling set in FY 2078/79 monetary policy).
Questions
Because the customer owes the money to the bank. The bank will receive it back with interest, so it is something the bank is owed.
It raises income, but loans made in a hurry can go bad later. Check the NPL ratio a year or two after a fast-growth period.