The decline in the profit of commercial banks has also hit the government’s tax collection from the banking sector. The income tax payment from the banking sector to the government has declined by 5.59 percent in the nine months of the current fiscal year 2022/23. The banks paid a total of Rs 19.99bn in income tax to the government as of the third quarter of the current fiscal year compared to Rs 21.16bn in the corresponding period of the last fiscal year. According to bankers, the decline in profit in the current fiscal year has directly affected the income tax. “As banks’ income and profit took a beating this year, their contribution to the income tax also suffered,” said Anil Sharma, CEO of Nepal Bankers’ Association (NBA).

With bad loans increasing gradually from the start of the current fiscal year, the banks have reported a sharp rise in non-performing loans (NPLs) in the last three months. Bankers attribute the rise in NPLs to the slowing economic activities coupled with higher interest rates, and borrowers’ inability to repay debts. According to them, loan recovery and debt servicing have become difficult of late.

With loan recovery and debt servicing becoming difficult, banks have been forced to provision huge amounts for NPLs. On the other hand, the high-interest rate that banks were forced to pay for their deposits in the first half of the current fiscal year, has increased their cost of funds. The NPL of commercial banks stood at 3.03 percent till mid-April, 2023. As NPLs surged sharply, the loan loss provisions of banks also increased. The amount for provisioning has increased by 324.27 percent. Banks have set aside Rs 31.32bn for loan loss provisions till mid-April 2023 compared to Rs 7.38 billion during the same period of the last fiscal year. While banks’ interest income grew by 31.60 percent, their interest expenses expanded by much higher during this period. As banks have to pay higher interest rates for deposits amid a prolonged liquidity crunch, their interest expense surged by 34.98 percent. This has affected the bank's net interest income which grew by 25.43 percent. Banks saw their net fee income and net trading income shrinking in the first nine months of the current fiscal. The net fee income decreased by 5.03 percent while net trading income shrunk by 36.74 percent during this period. The challenging macroeconomic climate has affected the profitability of banks; the commercial banks recorded a net profit of Rs 48.18bn in the third quarter of this fiscal compared to Rs 51.01bn during the same period of the last fiscal. Banks and financial institutions (BFIs) have to pay 30 percent in income tax in Nepal. Among the commercial banks, Nabil Bank paid the highest income tax of Rs 2.19bn, followed by NIC Asia Bank with Rs 1.72bn and Global IME Bank with Rs 1.7bn. Income tax paid by commercial banks FY 2022/23, Q3 Rs 19.99 billion FY 2021/22, Q3 Rs 21.16 billion FY 2020/21, Q3 Rs 21.91 billion