Performance of Commercial Banks in Q1Of declining profit and rising NPL

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On November 6, Sunil KC, the President of the Nepal Bankers Association (NBA), said that the non-performing loans (NPLs) of Nepali commercial banks remain within manageable limits. Despite the alarming 92 percent surge in NPLs reported in the first quarter of FY 2023/24 by commercial banks, the NBA, which serves as the umbrella organization for these banks, sought to alleviate concerns.

Despite the optimistic front presented by bankers regarding the condition of the banks, the indicators from the first quarter are less than promising. As Nepal grapples with an ongoing economic recession, its adverse effects are clearly evident in the performance of banks, which have reported a substantial decline in their profits.

The unaudited financial statement for the first quarter shows of the 20 commercial banks, 10 commercial banks saw their profit decline while one commercial bank posted a loss. “I’ve never encountered a situation where banks’ profits have declined in the very first quarter,” remarked a former banker with three decades of experience in the Nepali banking sector.

Banks managed to lower their NPL to 2.8 percent in the last quarter of FY 2022/23 from 3.03 percent in the third quarter of FY 2022/23. However, NPL has surged again in the first quarter of FY 2023/24 to 3.40 percent. The NPL stood at 1.77 percent in the first quarter of FY 2022/23.

The surge in bad loans signifies a higher volume of non-performing loans for banks. Bankers attribute the rise in bad loans to the economic downturn, as many businesses are facing challenges in meeting their loan repayment obligations. “The economic downturn has adversely affected almost every sector, including the banking industry. The impact of the economic slowdown in Nepal is evident as businesses grapple with the repercussions. Even during the festival season, there was a marginal increment in imports, highlighting the severity of the economic downturn,” said Nischal Nath Pandey, CEO of Sanima Bank.

Amidst the economic downturn in the country, banks encountered difficulties in recovering loans and servicing debts. Within the commercial banks, the Agricultural Development Bank has the highest Non-Performing Loan (NPL) ratio at 5.33 percent. Five banks have NPLs exceeding 4 percent, while seven banks report NPLs above 3 percent. Kumari Bank’s NPL has risen to 4.89 percent, with Nepal Investment Mega Bank at 4.83 percent, Laxmi Sunrise Bank at 4.69 percent, Himalayan Bank at 4.67 percent, and Global IME Bank at 4.38 percent.

The International Monetary Fund (IMF) has been raising concerns with Nepal Rastra Bank regarding the potential underreporting of bad loans by the country’s banks and financial institutions. The IMF estimated that the proportion of bad loans in South Asia remains relatively low, primarily due to the practice of issuing new loans to cover the principal and interest of existing ones (evergreening).

In response, the central bank has implemented various policy instruments over the past year to enhance regulation and supervision. These measures, including tightened oversight of working capital loans, aim to address concerns about unrestricted borrowing by businesses. The directive on working capital loans now restricts entrepreneurs from obtaining unlimited loans under this category, specifically preventing their use to pay interest on old loans or invest in non-designated areas.

During the first quarter of this fiscal year, there has been a significant decline in the profitability of banks. Agricultural Development Bank reported a loss of Rs 888 million, while banks such as Nabil Bank, NIC Asia Bank, Everest Bank, Sanima Bank, Nepal SBI Bank, Citizens Bank, Rastriya Banijya Bank, Kumari Bank, Laxmi Sunrise Bank, Siddhartha Bank, and Nepal Bank experienced a decline in their profits.

Bankers say the impact of the economic slowdown is now visible in the balance sheets of banks, reflecting a lack of growth in business. “We are facing challenges not just in business expansion but also dealing with issues stemming from the time of Covid, and these challenges are now surfacing,” said Sunil KC, president of the Nepal Bankers Association.

Bankers emphasize that the challenges extend beyond real estate and the stock market, affecting industrial, manufacturing, agriculture, and other crucial sectors. Despite assertions from the Finance Ministry and central bank officials about the country’s external sector recovery, they appear to be overlooking the issues plaguing the internal economy. “The severity of the problem is expected to become more pronounced in mid-December when banks release their second-quarter reports,” said a banker.

As non-performing loans (NPL) increase and profits decline, banks are experiencing a reduction in their return on investment. During the initial quarter of the current financial year, banks achieved an average return of approximately 8 percent. The return on equity (RoE) for banks witnessed a decline of 36.67 percent in the first quarter of the current fiscal year. The average RoE, which was 13.17 percent in the first quarter of 2022/23, has now decreased to 8.34 percent in the first quarter of 2023/24.

In the first quarter of the current fiscal, the Return on Equity has increased for three banks, while it declined for 17 banks. As of mid-October 2023, Prime Bank, Machhapuchhre Bank, and Himalayan Bank have seen a rise in their RoE, whereas all other banks have observed a decrease.

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