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With a significant surge in non-performing loans (NPL), commercial banks find themselves in a difficult position when it comes to distributing dividends to their shareholders from the profits of the last fiscal year. 

In the last fiscal year, while banks’ net profit surged by 25.03 percent, their distributable profit declined by 26 percent as they have to set aside a significant amount for regulatory adjustment. The profit of the banks reached Rs 70.17bn, but their distributable profit, which they can distribute to the shareholders, is only Rs 31.9bn. 

As per the unaudited reports of the banks, the average dividend ratio for commercial banks has declined by two percent points to 11.51 percent. This is in contrast to the 13.51 percent in the fiscal year 2021/22.  The dividend ratio may come down further after the final audit, according to bankers.

In the past few years, there has been a decline in the ability of banks to distribute dividends. The most significant capacity for dividend distribution by banks in the past decade occurred during the fiscal year 2012/13, reaching 22.25 percent.

In FY 2021/22, the distributable profit of banks stood at Rs 29.46bn, which was even lower than that of FY 2022/23. However, banks' dividend distribution capacity was higher than the last fiscal year.

Bankers attribute the decline in dividend distribution capacity to rising NPL and surge in provisioning amount. Krishna Bahadur Adhikari, the CEO of Nepal Bank, said that the reduction in dividend capacity can be attributed to the recent economic downturn. “The economic crisis has led to difficulties in recovering loan interests. And, a significant amount has to be set aside for provisioning for the bad loans,” said Adhikari. 

The unaudited financial report of the 20 commercial banks for the fourth quarter of the last fiscal year shows NPLs of all have surged in FY 2022/23 compared to FY 2021/22. The NPLs of banks have reached 2.8 percent, marking a staggering increase of 122.22 percent compared to FY 2021/22. The NPL of commercial banks stood at 1.26 percent in FY 2021/22.

With the sharp rise in NPLs, the loan loss provisions of banks have also increased. As per the unaudited financial reports for the fourth quarter, the amount for provisioning has increased by 94.37 percent. Banks have set aside Rs 25.93 bn for loan loss provisions till mid-July, 2023 compared to Rs 13.34bn during the same period of the last fiscal year. The total provisioning of banks increased by Rs 12.59bn in the last 12 months.

Banks have been experiencing a progressive decline in their capability to distribute dividends following increments in their paid-up capital. Over the recent years, banks have been augmenting their paid-up capital through mergers, acquisitions, and issuing bonus shares as dividend payments. Nevertheless, the growth in income and profits of these banks has not matched the proportional increase in capital. Sudesh Khaling, the CEO of Everest Bank, explains that due to this phenomenon, banks are facing a situation of reduced average dividend capacity.

According to Khaling, distributing the bonus shares of banks means automatically reducing the dividend capacity for the next year. “In the past few years, banks focused on giving bonus shares. They (banks), however, have not been able to earn income and profit, which has resulted in the weakening of their dividend distribution capacity,” said Khaling. 

Khaling said that when banks distribute bonus shares, they effectively decrease their dividend capacity for the following year. He noted that over recent years, banks have primarily emphasized providing bonus shares. “However, banks have struggled to generate income and profits, leading to a decline in their ability to distribute dividends,” said Khaling.

According to Nepal Financial Accounting Standard (NFRS), uncollected interest should also be reported as income, so there has been a significant increase in the net interest income of most banks. However, due to a non-recovery of the interest at the end of mid-July, the banks are under pressure when it comes to distributable profits.

Amongst the commercial banks, Everest Bank stands out with the capacity to offer the most substantial dividend payout derived from the earnings of the previous fiscal year. It has the potential to allocate dividends of up to 40.5 percent to its shareholders. The NIC Asia Bank can distribute dividends of 31.98 percent from the profit of the last fiscal year. Standard Chartered Bank Nepal can provide dividends of up to 28.99 percent.

Notably, both Kumari Bank and Himalayan Bank will be unable to distribute dividends for the preceding fiscal year due to their negative distributable profits.

Nepal Rastra Bank (NRB) has taken action against three commercial banks that violated the regulatory norms in the last fiscal year.

The central bank has slapped cash penalties to Kumari Bank and Himalayan Bank for not maintaining the 90 percent credit-to-deposit ratio (CD ratio) as per the regulatory norms. 

Kumari Bank was slapped with a cash penalty of Rs 5.96m on non-compliance of the CD ratio in January of the last fiscal year.

Similarly, Himalayan Bank has been slapped with a cash penalty of Rs 13.9m for not meeting the CD ratio in October of the last fiscal year.

The central bank has cautioned the Prime Commercial Bank. According to the NRB officials, the bank has been found to be non-compliant with the loan loss provision. The bank has also been found calculating risk-weighted assets below the actual value and charging interest by increasing the premium rate contrary to the provision of section 100 of the Unified Directives 2079 BS.

Commercial banks witnessed a substantial surge in their non-performing loans (NPL) in the last fiscal year, primarily due to the difficulties arising from the economic recession, a slowdown in loan recovery, and challenges in debt servicing.

The unaudited financial reports of 20 commercial banks for the last quarter of 2022/23 reveal that their non-performing loans (NPL) have reached 2.71 percent, marking a staggering increase of 115.07 percent compared to 2021/22. The NPL of commercial banks stood at 1.26 percent in 2021/22.

Throughout the last fiscal year, the banks grappled with an escalating number of bad loans. The Nepal Rastra Bank (NRB) even stated that bad loans could potentially reach as high as five percent by the end of 2022/23. 

As the country struggled with an economic downturn, banks faced challenges in loan recovery and debt servicing during the last fiscal year. Bankers attribute the rise in NPA to the combination of slowing economic activities, higher interest rates, and borrowers’ declining ability to repay debts. According to them, the cash flow in the market has been affected severely, leading to a decline in the demand for goods and services. The government’s inability to pay billions of rupees it owes to the contractors has added problems as borrowers related to the construction sector have not been able to repay their loans.

Although bad loans had been steadily increasing since the beginning of the current fiscal year, the non-performing loans (NPL) declined in the last quarter of 2022/23. After rising to 3.03 percent in the third quarter of the last fiscal, the NPL retreated to 2.71 percent in the fourth quarter. The banks were successful in reducing their bad loans by adopting an aggressive approach to loan recovery in the last quarter of the previous fiscal year.

Among the commercial banks, five banks experienced NPLs exceeding four percent. Kumari Bank recorded the highest NPL at 4.77 percent, followed by Himalayan Bank with 4.57 percent and Nepal Investment Mega Bank with 4.35 percent. Similarly, Prime Commercial Bank’s NPL reached 4.23 percent, and Prabhu Bank reported an NPL of 4.16 percent.

Two banks have NPLs above three percent in the last fiscal year. The NPL of Citizens Bank and Global IME Bank stood at 3.19 percent and 3.08 percent respectively. On the other hand, eight banks' NPL stood above two percent. Only two banks—NIC Asia Bank and Everest Bank—have managed to keep their NPL below one percent in FY 2022/23. The NPL of NIC Asia and Everest Bank stood at 0.8 percent and 0.79 percent. 

With the sharp rise in NPLs, the loan loss provisions of banks have also increased. As per the unaudited financial reports for the fourth quarter, the amount for provisioning has increased by 94.37 percent. Banks have set aside Rs 25.93bn for loan loss provisions till mid-July, 2023 compared to Rs 13.34bn during the same period of the last fiscal year. The total provisioning amount of banks increased by Rs 12.59bn in the last 12 months.

With Nepal Rastra Bank adopting tighter monetary policy along with a slowdown in loan demand, the commercial banks’ lending grew by a marginal 3.42 percent in the last fiscal year. 

The commercial banks that experienced a liquidity crunch in the first half of the FY 2022/23 saw problems of non-disbursement of loans in the second half of the last fiscal. Bankers said demands for loans have remained low throughout the last fiscal. 

While the NRB had targeted private sector credit growth to 12.6 percent in 2022/23, the actual credit growth remained much lesser than the target. In fact, the credit expansion to the private sector in 2022/23 was far less than what the banks lent in 2021/22. The banks’ lending grew by 3.42 percent in 2022/23 compared to 12.2 percent in 2021/22.

According to bankers, the private sector has not sought bank loans with the deepening economic downturn. On the other hand, retail loans such as housing loans and auto loans did not grow due to higher interest rates. While the BFIs gradually lowered the loan interest rates, the demand for loans did not surge as expected.

According to the data of the Nepal Bankers Association (NBA), commercial banks disbursed loans amounting to Rs 144bn in 2022/23 whereas such loan disbursement in 2021/22 stood at Rs 454bn. The total lending of banks by the end of the last fiscal year stood at Rs 4,318bn. 

“The demands for loans have remained subdued due to the state of the economy and businesses,” said Sudesh Khaling, CEO of Everest Bank, “In the initial months of the last fiscal, credit flow could not increase due to a lack of liquidity in the banking system. Later, when the liquidity situation improved, there was no demand for loans.”

Bankers say the other reason behind the sluggish lending is banks have become more cautious in loan disbursement due to a sharp rise in non-performing loans (NPLs).

According to the private sector, the high-interest rates also contributed to lower demand for loans. The private sector has been demanding that interest rates need to be lowered arguing that the average interest rate of loans remained higher that previous years. 

Deposits of commercial banks increased by 12 percent in 2022/23. The banks’ deposits stood at Rs 5,086bn in mid-July 2023 from Rs 4,541bn in mid-July 2022. The banks’ deposits increased by Rs 545bn in the last fiscal.   

After going through a liquidity crunch in the first half, the banking system was flushed with excess liquidity by the end of the last fiscal. With demands for loans drying up, investable capital piled up in the banking system in the last few months of 2022/23. 

With lesser demand for loans, the CD ratio of commercial banks came down to 82.10 percent in mid-July 2023, which was 88.07 percent in mid-July 2022. As per central bank regulatory norms, banks can disburse 90 percent of their deposits in loans. Banks have to maintain the credit-to-deposit ratio (CD ratio) at 90 percent. 

Two days after Nepal Bankers Association (NBA) decided to let the banks set their own interest rates, commercial banks on Sunday published their new interest rates for the month of Shrawan (mid-July to mid-August).

With the banking system flushed with excess liquidity, the NBA, an association of commercial banks’ CEO, on Thursday decided to allow the banks set the interest rate themselves, doing away with the long-standing interest rate cartelization practice.

Of the 21 commercial banks, four banks have decided to increase the interest rate on deposits, ten banks to decrease while six banks have kept the deposit interest rate as it is.

Sudesh Khaling, Chief Executive Officer (CEO) of Everest Bank said that banks have fixed the interest rate of deposits based on their requirements. "Banks having more deposits have reduced interest rates while those that need deposits have increased," said Khaling.

Since there is a low demand for loans, the majority of banks have lowered their interest rates. “This is what happens in an open and free market. Diversification in interest rates also gives customers the opportunity to choose the banks,” said Khaling.

The NMB Bank, Nabil Bank, Prime Commercial Bank, and Kumari Bank have increased the interest rate on deposits.  Nabil Bank has increased its maximum interest rate to 10.49 percent for fixed deposits. The bank has offered 5.90 to 7.90 interest rates for saving accounts. 

Among the commercial banks, NMB Bank has offered the highest interest rates on fixed deposits. The bank has introduced fixed interest rates for different periods, ranging from a minimum of nine percent to a maximum of 10.98 percent. The bank’s savings account holders will get interest rates from 5.98 to 7.98 percent.

Prime Commercial Bank has fixed interest rates of up to 10.93 percent for fixed deposits. As for the savings accounts, the bank has offered interest rates of 5.93 to 7.93 percent.

Nepal Investment Mega Bank, Global IME Bank, Lakshmi Sunrise Bank, Nepal SBI Bank, Himalayan Bank, and Citizens Bank have decided to maintain their existing interest rates.  The interest rate on fixed deposits of these banks stands at 9.99 percent.

While some banks have adjusted their interest rates upwards, others have opted to lower them. Rastriya Banijya Bank, Prabhu Bank, Nepal SBI Bank, Machhapuchhre Bank, Everest Bank, Standard Chartered Bank, Siddhartha Bank, Sanima Bank, Nepal Bank, and Agricultural Development Bank have all reduced their interest rates.

Standard Chartered Bank Nepal has the lowest interest rate of 8.95 percent for fixed deposits. The bank has offered 8.95 percent interest on individual fixed deposits and 6.95 percent interest on institutional fixed deposits.

Commercial banks had decided to keep the deposit interest rate unchanged for the month of Ashad (mid-June to mid-July).

Currently, the banking system has deposits amounting to Rs 5,730bn, while loans totaling Rs 4,853bn. Since Baisakh, the banking system has collected Rs 242bn in deposits. In the first three weeks of Ashad (the last month of the fiscal year), Rs 147bn in deposits have been added to the banking system. With the improvement in liquidity, the CD ratio currently stands at 81.75 percent. Banks can provide loans with a CD ratio of up to 90 percent.

After reducing the deposit interest rate in Baisakh (mid-April to mid-May), the NBA, the association of CEOs of commercial banks, decided to keep it unchanged for the month of Jestha (mid-May to mid-June).

In Baisakh, under huge pressure from the private sector, NBA lowered the deposit interest rate to 9.99 percent for individual depositors. Similarly, the interest rate for institutional deposits was lowered to 7.99 percent from 9 percent.