Commercial Banks See Decline in Net Interest Earnings Amidst Rising Bad Debts and Sluggish Loan Demand
Commercial banks have reported a decline in net interest earnings in the first three months of the 2024/25 fiscal year due to a lack of significant lending increases. Financial reports from 20 banks reveal a 6.09 percent drop in net interest earnings, falling from Rs 49.57 billion to Rs 46.55 billion between mid-July and mid-October this year compared to the same period last year.
The primary source of earnings for banks, the difference between interest charged on loans and interest paid on deposits, is under pressure as banks grapple with high deposit levels and stagnant loan demand amid an economic slowdown. Currently, Nepali commercial banks hold deposits totaling Rs 5.903 trillion, while lending amounts to Rs 4.664 trillion, leaving them with excess liquidity exceeding Rs 90 billion, according to the Nepal Rastra Bank (NRB).
In response to their ample loanable funds, banks have significantly lowered lending rates over the past year, with base interest rates dropping by an average of 2.64 percentage points to 7.34 percent, reaching as low as 5.71 percent per annum. However, these reduced rates have not successfully stimulated borrowing. The Nepal Bankers’ Association reports that banks issued an additional Rs 111 billion in loans during the first three months of the fiscal year, reflecting a modest growth of only 2.43 percent.
Of the 20 banks reviewed, 14 experienced a decline in net interest earnings, with Agriculture Development Bank seeing the most significant drop at 25.18 percent. In contrast, six banks reported increases, with Prime Commercial Bank achieving a notable 16.67 percent rise.
Bankers attribute the decline in net earnings to a rise in bad debts, which now stand at 3.71 percent, up from 3.53 percent in the previous period. As per regulatory guidelines, banks must set aside provisions for different categories of loans, with substandard loans requiring 25 percent provisioning, doubtful loans needing 50 percent, and bad debts requiring full provisioning.
Devendra Raman Khanal, CEO of Rastriya Banijya Bank, noted that demand for new loans remains weak, while banks are focusing on recovering non-performing loans.
Despite the decline in net interest earnings, banks managed to increase net profits by 20.17 percent to Rs 16.18 billion in the first quarter, largely due to a more accommodating monetary policy from the central bank. This policy has extended the deadline for principal and interest payments on loans to construction entrepreneurs until November 2024 and reduced the mandatory loan loss provision on performing loans from 1.2 percent to 1.1 percent.
