Commercial banks' post 43% more profit. Here is what you should know.

Nepal’s 20 ‘A’ class commercial banks posted a net profit of NRs 71.62 billion last fiscal year [based on their unaudited financial statements]—a notable 43.3% increase compared to the audited results of the previous fiscal year. 

The rise in profitability has come after the Nepal Rastra Bank (NRB) made key policy adjustments toward the end of the last fiscal year. Until 10 months of the last fiscal year, the banks’ profit stood at NRs 47.8 billion—indicating that a quarter of the annual profit was earned in the last two months. 

The banks have also been able to reduce their loan loss provisioning last fiscal year to NRs 17.48 billion—which was NRs 23.48 billion the previous fiscal year hinting progress in banks’ recovery and improvement in asset quality.

Earlier Governor Bishwo Poudel, presenting his first monetary policy in July after being appointed the Governor on 20 May, revised the loan loss provision as part of broader monetary policy easing. The loan loss provisioning for performing (pass) loans was reduced to 1.1% from the existing 1.2% citing strain on banks’ capital funds and the need to align with macro-prudential norms. 

Before that, in June, the central bank permitted banks a one-time conditional restructuring and rescheduling of loans up to NRs 20 million extended to sectors such as agriculture, energy, and SMEs. Conditions included detailed assessment of the business plan and cash flow, and recovery of at least 10% of the due interest.

Another factor that helped banks reduce their provisioning was the recovery of loans from construction sector contractors after the government paid their outstanding dues. The non-payment which had reached around NRs 50 billion according to some estimates persisted for three years.

A quick recap of banking indicators last fiscal year
 
Banks were able to secure strong profits thanks to loose policies, including lower provisioning rates than growth in credits despite tremendous liquidity throughout the year.

The NRB actively absorbed excess liquidity throughout using different monetary instruments. By the first 11 months, it had absorbed 21.34 trillion rupees, which included NRs 2.78 trillion through the deposit collection auction and 18.56 trillion through the Standing Deposit Facility (SDF) whereas it had lent NRs 2.7 billion through the overnight lending facility. 

In the corresponding period of the previous fiscal year, the NRB mopped net liquidity amounting to NRs 1.9 trillion. Such was the scale of the surplus liquidity last year but NRB’s liquidity management framework provided banks with modest returns on their idle funds when they couldn’t be loaned. 

Average base rates had come down from 7.6% to 6.1%; yet cheaper loans did little to stimulate borrowing. Credit grew at 8% although NRB's target was 12%.

Similarly, out of 20 commercial banks, 16 banks reported growth in profit while the remaining four saw a decline. Among 16, some banks such as Prabhu, Kumari and Nepal Bank have posted unusual profits exceeding 500%. This anomaly appears to stem from the practice of overstating unaudited profits, later revised downward during audits typically by around 20%. For instance, the combined unaudited profits of banks in 2023/24 stood at 64.2 billion, later revised to NRs 49.5 billion—by 23%.

What lies ahead?

A growing concern for the financial system is the higher level of NPLs. While the NRB requires commercial banks to keep non-performing loans (NPLs) below 5%, the current average [last fiscal year] sits at 4.2% from the previous year’s 3.8%. There are also fears that the true scale of bad loans may be underreported.

Last fiscal year, the NRB declared Karnali Development Bank as crisis ridden and took over its control. Investigations revealed its NPLs had reached a staggering 40.9%, far higher than initially reported. Other development banks and financial institutions also struggled with significant levels of NPLs, many surpassing 10%.

To address the mounting bad loans pressure, the government announced plans to launch the country’s first Asset Management Company (AMC) in its last budget in June. The initiative will be a part of broader financial sector reform strategy to stabilise the financial sector. The plan was reinforced in the latest monetary policy with the NRB committing to complete legal procedures for the AMC within the ongoing fiscal year. 

The AMC will be tasked with acquiring and managing distressed loans and non-banking assets held by banks and financial institutions—essentially acting as a cleanup mechanism to help stabilise the system and restore lending confidence. 

Additionally, asset quality of the country’s 10 largest banks is currently under independent review of a Bangladeshi auditing firm Howladar Yunus and Co. appointed by the NRB in June. The review was prompted by persistent concerns raised by the International Monetary Fund (IMF) over the reliability of credit quality.