Banking sector ‘healthy’ despite Q1 profit dip

Bankers have claimed that the banking sector is healthy, despite a drop in profits during the first quarter of fiscal year 2023/24.

While financial experts have termed the performance of commercial banks disappointing based on their first-quarter financial statements, CEOs of commercial banks refuse to acknowledge the results as such. Bankers argue that the reduction in profit in the first quarter is primarily due to increased loan loss provisioning, which they view as a positive step for the future. The increase in loan loss provisions, coupled with a rise in non-performing loans, has impacted the profitability of commercial banks, they say.

Ashoke SJB Rana, Chief Executive Officer of Himalayan Bank Ltd, believes that the level of loan loss provisioning and the capital funds maintained by banks indicate that the banking sector is healthy. “The non-performing loans are unlikely to increase further; instead, they will be effectively managed,” Rana said, adding that both the banks and the central bank have tightened lending due to pressure on the Nepali economy.

Sunil KC, President of the Nepal Bankers Association, the umbrella organization of commercial banks in the country, attributed the challenges faced by the banking system to global economic recession, conflicts, a slowdown in the private sector, and the resulting increase in non-performing loans. KC expressed confidence that non-performing loans have peaked and will now be gradually managed, mentioning that banks have set aside a substantial amount, Rs 16bn, for loan loss provisioning. “While significant funds have been allocated for provisioning, credit disbursement has not increased as per our expectation,” KC added.

According to KC, as of Nov 3, total deposits in commercial banks have increased by Rs 120bn, while loan disbursements have risen by Rs 84bn since the beginning of the fiscal year in mid-July. “We had anticipated higher credit disbursements, but it did not materialize,” he added.

The financial statements released by banks indicate that non-performing loans in commercial banks now stand at 3.06 percent, up from 2.9 percent in mid-June. KC attributed the high non-performing loan levels to the Covid-19 pandemic. “We kept on restructuring loans, now we need to be careful to manage the situation,” KC said. “Although some loans have defaulted due to portfolio diversification, the chances of them turning into bad loans are minimal.”

Commercial banks have reported a drop in profit for the first time compared to previous fiscal year.. During the review period, banks did not see growth in their interest income. Their income from other fees also grew by only Rs 1bn. Meanwhile, commercial banks have pledged to contribute more than Rs 50m to the government’s relief fund for Jajarkot earthquake survivors.