Kathmandu. The fiscal year 2082 released by the commercial banks operating in Nepal was 2082. The crude financial statement of 83 presents a paradoxical picture of the banking sector.
On the one hand, the main business of the banks, i.e., the net interest income, has contracted or shown low growth, while on the other hand, the net profit has increased by more than 32 percent. This indicates that banks have now been able to increase the size of their profits by bringing back the old loan recovery and loan loss provisions rather than by expanding new business.
According to the financial statement, the net profit of the 20 commercial banks increased by 32.32 percent to Rs 69.88 billion compared to the previous year. According to the last audited report, the banks made a profit of Rs 52.81 billion in the last fiscal year. At first glance, this increase in profit may seem very encouraging, but when we analyse the source and quality of profits, it is clear that the banking sector is still not free from business pressures.
Net interest income, which is the main backbone of banks’ earnings, has been very slow. The net interest income of the overall banking sector increased by only 1.27 percent. This reflects the low demand for credit in the market and the fact that banks are not able to generate enough income from new investments. The interest income of some big banks has also decreased compared to the previous year. This indicates that even though liquidity is easy, the main business of the banks is shrinking due to the lack of credit flow in the productive sector.
This low growth in interest income also reflects the competition of interest rates among banks on the one hand and the compulsion to stay within the range of the spread rate set by the central bank on the other. The interest expense on the deposits collected by the banks has increased, but the income from the loans has not been made in the same proportion, which has put pressure on the profit from the core banking business.
The rise in the profitability of banks in the last fiscal year is mainly attributed to the decline in loan loss provisioning. The total provision amount of the banking sector has decreased by 27.65 percent. Last year, the profitability of the banks was affected due to the separation of a large part of the profit for bad loan management. However, the aggressive strategy of banks in the last year in the recovery of non-performing loans and reducing the provisioning amount, its direct positive impact seems to have been on the final profit.
Moreover, some banks have written back the amount set aside for bad loans last year. For example, even though the interest income of some banks has decreased, their profits have increased up to three times due to the withdrawal of provisioning. In this way, it can be analyzed that this year’s profit graph has gone up due to technical and managerial adjustment rather than business profit.
Unbalanced Profits and Bad Debt Challenges
The report also shows that the situation of all banks is not the same. On the one hand, banks like Nabil, Kumari and Global IME have made profits of billions of rupees, while on the other hand, institutions like Prabhu Bank are seen making losses. The total profit of 20 banks is around Rs 70 billion, but only the top three banks have a share of more than Rs 21 billion.
While the profits of most banks are increasing, the main reason for the huge decline in the profits of some banks and the loss of some banks is the burden of bad loans. Even though the interest income has increased, the balance sheet of the banks has been affected due to the failure to recover the old loans and the provision of hundred percent for those loans. Some big banks are still compelled to allocate Rs 5 to 6 billion for provision, indicating that the problem of bad loans has not been completely solved.
Another reason why some banks have kept profitability balanced even when interest income has declined or slowed is due to cuts in their operating expenses and an increase in non-interest income. Banks have been increasing their income from service charges, commissions and other digital banking transactions in recent times. In addition, the reports show that banks are trying to improve their efficiency by keeping operating expenses under control.
Some old and established banks are far ahead when analyzing how much profit they can extract from the interest income of 1 rupee. Their efficiency has set an example of how to make a business profitable even in difficult market conditions.
Although the external sector of the economy is strong, the flow of credit to banks is sluggish due to lack of demand in the domestic market. The challenge for banks to come in the coming days is to profit from real business growth rather than on the basis of provision write-backs. If the economy does not revive in the coming days and the demand for credit does not increase, it will be difficult to sustain the current luster of profits. The main conclusion of this report is that the next priority of the banks should be to focus on expanding investment in new areas and fully managing the remaining bad loans.
