Kathmandu. Money has piled up in the banking system. Loan interest rates have come down and the profits of banks have also increased. <\/p>\n
Generally, all these three conditions are considered positive for the banking sector. However, the current financial statements do not show the expected relationship between these indicators. Even with the fall in interest rates, the demand for loans has not expanded significantly. Even though the profits of banks have increased, the regular income has not improved. Instead, the competition among banks to win over a limited number of borrowers and customers has intensified. <\/p>\n
The current fiscal year 2083. The financial statements for the first quarter of 2018 have exposed this contradiction in the banking sector. The net profit of 20 commercial banks increased by 45.59 percent to Rs 19.14 billion compared to the previous year. However, the net interest income, the main business income of the banks, increased by only 0.97 percent. That is, the regular interest income did not improve even by one percent as the profit increased by almost half. <\/p>\n
This shows that the reduction in the amount to be set aside for loan loss management has been decisive in increasing the profit of the banks. The banks are making profits. However, the basis of this has not been the creation of new loans and the expansion of interest income. <\/p>\n
In the first quarter of the last financial year, 20 commercial banks had earned a net profit of Rs 13.15 billion. In the same period of the current financial year, the profit has increased to Rs 19.14 billion. The profit of 16 banks has increased while one bank has returned to profit from loss. The profit of three banks has decreased. At first glance, this is an improvement in the banking sector. However, looking at the income structure, the basis of improvement seems to be different. <\/p>\n
The net interest income of the banks increased to Rs 49.67 billion from Rs 49.20 billion in the previous year. The income of Rs 47.51 crore added in a year shows how slow the pace of business expansion of the banks is. <\/p>\n
Due to the continuous increase in remittance inflow in recent times, investable money has accumulated in the banking system. However, the demand for loans has not increased according to the available liquidity. Industrialists and businessmen are not enthusiastic about taking loans for new investment as business activities have not expanded as expected. This has created an imbalance between the deposits of the banks and the expansion of loans. <\/p>\n
The problem of banks is that they are not able to convert their deposits into quality loans. As the demand for new loans has weakened, there has been increased competition among banks to attract customers who are already taking loans. By using the facility of transferring loans from one bank to another, banks are offering cheaper interest rates to borrowers of competing institutions. There is also a need to reduce interest rates to protect old customers. <\/p>\n
This has changed the nature of banking competition. There is a tendency to take away the share of the business available in the market rather than creating new business. A customer taking a loan from one bank can move to another bank at a cheaper interest. While this gives immediate benefits to the individual borrower, it does not add new investment and economic activity to the overall banking system. <\/p>\n
The impact of this competition is seen in the interest rate differential. In the first quarter of the current financial year, the spread rate of 19 out of 20 commercial banks has decreased. Himalayan Bank’s spread has come down from 3.34 percent to 2.78 percent. Everest Bank’s spread has been reduced from 3.36 percent to 2.96 percent and NIC Asia has been reduced from 3.99 percent to 3.31 percent. Nabil and Global IME Bank have the same spread of 3.17 percent. Only Standard Chartered Bank has increased the spread from 3.63 percent to 3.68 percent. <\/p>\n
The central bank has set a maximum spread limit of 4 percent for commercial banks. But due to the competition in the market, the real spread of most banks has been reduced far below that limit. The decrease in the spread means that the difference between the interest paid on deposits and the interest earned from the loan will decrease. This creates pressure on the main income of the bank. <\/p>\n
The net interest income of the banks shows how deep the spread pressure is. The net interest income of 10 out of 20 banks has decreased compared to the previous year. The net interest income of Kumari Bank declined by 28.19 percent to Rs 2.09 billion. Prabhu Bank fell by 19.36 percent and NIC Asia by 17.35 percent. Himalayan Bank contracted by 12.31 percent and Citizens Bank by 7.49 percent. <\/p>\n
On the other hand, the net interest income of Rastriya Banijya Bank increased by 37.46 percent to Rs 4.01 billion. Nabil Bank increased by 21.42 percent to Rs 4.73 billion. The interest income of Machhapuchchhre, Siddhartha, Sanima and Prime Commercial Bank also increased. <\/p>\n
This shows that the business performance of the banks is different even in the same market conditions. However, it is not a common matter that in the overall system, the main income of half the banks is reduced and the total income growth is less than one percent. At a time when the profits of the banks are increasing, such a situation of the main business raises questions about the quality of profits. <\/p>\n
The most important basis for the profit growth of the banks is the decline in the loan loss system. In the first quarter of last year, the banks had allocated Rs 20.14 billion for the management of potential loan losses. In the first quarter of the current financial year, such amount has come down to Rs 11.09 billion. This is a decline of 44.9 percent. <\/p>\n
That is, banks have set aside about Rs 9.04 billion less for loan loss management than the previous year. Improvement in bad loan recovery, reduction in provisioning requirement in the past and improvement in loan classification seem to have played a role in this. <\/p>\n
Nabil Bank’s provisioning declined by 74.66 per cent. Sanima Bank’s 65.41 per cent, Kumari Bank’s 64.40 per cent and Rastriya Banijya Bank’s 63.51 per cent. Nepal Investment Mega Bank also saw a 60.81 per cent decline. Prime Commercial Bank’s provisioning increased by 28.30 per cent to Rs 61.71 crore. <\/p>\n
The reduction in provisioning is not negative in itself. The increase in loan recovery and the decrease in risk is positive for the bank. However, the profit earned by cutting provisioning and the profit earned from regular business are different in nature. The loan loss system is not likely to decrease forever. Therefore, in the coming quarters, banks will have to increase their regular income to maintain profit. <\/p>\n
Nabil Bank topped the list with a net profit of Rs 2.55 billion. Global IME Bank earned a profit of Rs 2.31 billion and Rastriya Banijya Bank earned a profit of Rs 1.64 billion. Nepal Investment Mega Bank’s profit increased by 2,519.51 percent to Rs 1.18 billion. The profit of Agricultural Development Bank also increased by 1,815.79 percent. The decline in provisioning seems to be important in the high profit growth of these banks. <\/p>\n
The financial statements of the first quarter show that even though the liquidity in the banks is sufficient, it has not been able to mobilize it in the productive sector. Banks can attract customers by reducing interest rates. However, this alone does not create a demand for credit. The money accumulated in the banking system cannot be fully utilized until an environment is created to increase investment in new industries, businesses and projects. <\/p>\n
The current profit growth cannot be considered as a sustainable improvement in the banking sector. Principal interest income is sluggish, the spread of most banks has decreased and the contribution of provisioning cuts to profitability is huge. In the coming days, as the space for provisioning reduction is limited, banks will be under pressure to increase their profits through regular business. <\/p>\n
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