KATHMANDU, Oct 25: Failing to increase lending by a notable amount, commercial banks have witnessed their net interest earnings decline in the first three months of the current Fiscal Year (FY) 2024/25.
The financial reports unveiled by 20 commercial banks show that their net interest earnings during mid-July and mid-October this year declined by 6.09 percent compared to the same period of the last fiscal year. In the review period, their net interest earnings dropped to Rs 46.55 billion from Rs 49.57 billion.
The difference in interest on loans that the banks charge borrowers and the interest they provide to depositors is the main source of earnings for banks. At present, banks are overloaded with excessive deposit amounts while the demand for loans has not grown impressively due to the economic slowdown.
As of Tuesday, Nepali commercial banks have collected deposits of Rs 5.903 trillion whereas their lending stood at Rs 4.664 trillion, according to Nepal Rastra Bank (NRB). Currently, banks are having excess liquidity of more than Rs 90 billion.
Lending slows as banks focus on recovery of loans at fiscal yea...
Citing the excessive loanable funds with them, the commercial banks have largely reduced their lending rates in the past one year. Over the period, the base interest rates of banks decreased by an average of 2.64 percentage points to 7.34 percent. The base interest rate has come down to as low as 5.71 percent per annum.
The drop in interest rates, however, has failed to attract the borrowers. According to Nepal Bankers’ Association, the banks provided additional loans worth Rs 111 billion in the first three months of the current fiscal year. It shows a growth of only 2.43 percent.
In the review period, a total of 14 commercial banks had their net interest earnings decline with Agriculture Development Bank recording the largest drop of 25.18 percent. Of the six banks with an increase in their net interest earnings, Prime Commercial Bank generated the highest of 16.67 percent.
Bankers attributed the increasing bad debt to the decline in their net earnings. The commercial banks are now reported to have bad debt of 3.71 percent, an increase from 3.53 percent in the review period.
For the substandard loans, the banks and financial institutions (BFIs) have to maintain 25 percent of the amount in provisioning. In case of doubtful loans, the provisioning amount is 50 percent, while for the bad debts, banks need to maintain a cent percent amount in provisioning.
According to the central bank’s guideline, substandard loans are those loans whose interest and principal payments are due up to six months. The doubtful loans are those in which payments remain due for six months to one year, while the overdue period is more than one year in case of bad loans.
Devendra Raman Khanal, chief executive officer of Rastriya Banijya Bank, said the demand for new loans is pretty slow while banks are facing challenges to recover their non-performing loans. According to him, banks are now focused more on recovering their non-performing loans.
Despite a drop in the net interest earnings, banks are able to increase their net profit by 20.17 percent to Rs 16.18 billion in the first quarter, mainly due to the flexibility adopted by the central bank in its monetary policy for the current fiscal year. The monetary policy has extended the deadline for the payment of principal and interest on loans disbursed to construction entrepreneurs till November 2024. Likewise, the policy has also reduced the mandatory loan loss provision on good loans to 1.1 percent from 1.2 percent.
