Nepal's commercial banks report 32% profit surge driven by loan recoveries

Nepal's commercial banks have reported a substantial 32% year-on-year rise in net profit for the fiscal year ending mid-July, accumulating a combined Rs69.78 billion. This financial upswing occurred despite a backdrop of weak economic activity, sluggish credit demand, and a notable increase in excess liquidity within the banking system.

Bankers attribute this profit surge not to increased lending, but to improved loan recoveries in the final quarter of the fiscal year. These recoveries enabled banks to reverse some impairment charges and reduce their provisioning for potential loan losses. Santosh Koirala, president of the Nepal Bankers’ Association, clarified that loan disbursement saw only marginal improvement, with net interest income showing little gain. "The bottom-line growth is almost entirely driven by notable recoveries of bad loans," he stated.

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Loan disbursement showed negligible improvement over the fiscal year, resulting in only marginal gains in net interest income. The bottom-line growth is almost entirely driven by notable recoveries of bad loans.

The improved loan recovery might signal a gradual revival in real estate transactions and a greater willingness among borrowers to repay debts. However, the overall economic picture remains challenging. For the third consecutive year, banks have contended with large amounts of excess liquidity, while private-sector credit demand has stayed subdued. Domestic industries are operating at only about 42% of their capacity, and the ongoing crisis in the cooperative sector has further dampened consumption.

While some banks saw significant profit increases, such as Himalayan Bank with over 1,100% growth from a low base, the performance was uneven. Sixteen of the 20 commercial banks reported higher profits, but three saw decreases, and Prabhu Bank incurred a net loss. Nabil Bank led in absolute profit with Rs7.90 billion. Executives caution that this profit growth does not necessarily indicate a broad-based economic recovery. Sudesh Khaling, CEO of Everest Bank, noted that regulatory concessions also supported bank balance sheets, but stressed that sustained profit growth requires improved underlying economic fundamentals.

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While loan recovery improved for several large institutions, lowering provisioning write-offs, liquidity remains heavily trapped in the banking system while fresh credit demand is virtually absent. Banks cannot sustain profit growth over the long term unless underlying economic fundamentals improve.