Low credit growth, rising NPL hit Q2 profit of Commercial Banks

Relatively low credit growth as compared to previous years and loan-loss provisioning against rising Non-Performing Loan (NPL) have hit the profit of commercial banks in the second quarter (mid-July to mid- January) of the current fiscal 2023/24.

The unaudited financial statements disclosed by commercial banks show the average profit growth of 20 commercial banks in operation has plunged into negative territory by 14.77% at the end of the second quarter.

Meagre credit growth and NPL are considered the most affecting factors obstructing banks from improving their performance.

In this fiscal, merely 4.3% credit growth has been witnessed, which has affected the banks’ interest income. On the other hand, banks were compelled to pay high interest rates to depositors in this period, which is being gradually corrected after the second quarter of this fiscal as banks are flush with liquidity. Interest rate on deposits and credit has been lowered. It is reported that banks have the appetite for lending more than Rs 660 billion in the current scenario against credit growth of just Rs 183.83 billion during the period of mid-July to mid-January 2024.

“Interest income is the major income source of banks and when credit growth stalled due to the downturn in economy it hit the banks hard,” said Bhuvan Kumar Dahal, former President of Nepal Bankers’ Association (NBA). Though there is debate regarding the profit of banks, they must generate profit by operating transparently for the country’s financial sector stability. Till the second quarter, the credit of commercial banks reached Rs 4,453.58 billion, almost close to the country’s Gross Domestic Product (GDP).

NPL: Is it scary for banks?
NPL remains consistently high at 3.4% since the first quarter of this fiscal 2023/24. NBA President, Sunil KC said this is manageable and it may not shoot up further. “Though caution needs to be taken,” he said. In the current context, commercial banks have not been able to recover Rs 151.4 billion and that amount itself is high. KC underlined that once economic activities revive, credit recovery will also improve. He further remarked that the profit of the banks was affected as the provisioning amount shot up along with the increase in non-performing loans. Banks are required to allocate funds from their profit to cover the potential default on their loans. In mid-January last year, the NPL level was at 2.3%.

Impact on the economy
The International Monetary Fund (IMF) has been expressing concerns on the asset quality of banks. The capital adequacy ratio of banks is above the regulatory threshold, and the consistently high interest rates have deteriorated the loan repayment capacity of borrowers when economic activities have slowed down as a result of which the asset quality of banks is worsening. Surging NPL is something to worry about for the regulator, Nepal Rastra Bank, and obviously the government.
For instance, the amount of NPL which stands at Rs 151.4 billion, could pose multiple challenges in the economy, primarily, it could distort the financial sector. Lack of credit recovery impacts the bank’s health, not only the operating efficiency, but the lending capacity will also shrink. In this regard, Nepal Rastra Bank – central regulatory and monetary authority – has been suggested to work on lowering the NPL. The loan mobilised by banks is depositors’ money, which banks have to return to them. Rising NPL could create distrust among the people regarding banks and the financial system of the country as a whole. “Banks contribute to attaining economic growth as targeted by the government by providing loans to the private sector and rising NPL drags banks behind from expanding credit that affects the government’s economic growth target and stalls the growth of the private sector,” according to Dr Chiranjibi Nepal, former governor of the central bank, who is serving as an economic advisor to the president currently. He said, “The enterprising mass trying to avail credit from banks will be deprived from their right to obtain credit if recovery of credit is deferred for an indefinite period.”

Banks’ Q2 profit and NPL
Till the second quarter of the current fiscal year, overall profit of commercial banks was just Rs 28.76 billion. In terms of profit, top five banks cover almost 40% of the total profit, namely, Nabil Bank (Rs 3.2 billion), Prime Bank (Rs 2.18 billion), Global IME Bank (Rs 2.04 billion), Rastriya Banijya Bank (Rs 2.01 billion) and NIC Asia Bank (Rs 1.9 billion). Whereas the bottom five banks in terms of profit are Nepal Bank (Rs 590.05 million), Prabhu Bank (Rs 720.34 million), Citizens Bank (Rs 782.78 million), Machhapuchchhre Bank (Rs 805.38 million) and Nepal SBI Bank (Rs 840.54 million). In addition, almost a dozen banks with NPL higher than the industrial average of 3.4% are namely, Kumari Bank (4.97%), Himalayan Bank (4.95%), Prabhu Bank (4.9%), Nepal Investment Mega Bank (4.75%), Global IME Bank (4.68%), Laxmi Sunrise Bank (4.67%), Nepal Bank (4.5%), Citizens Bank (4.07%), Prime Bank (4.07%), Rastriya Banijya Bank (3.95%) and Nabil Bank (3.8%).

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