First Q Result Disappoints Banks

B360 Special Correspondent

Profit growth of commercial banks steeply dropped in the first quarter of the current fiscal 2017-18 compared to the corresponding period of the previous fiscal, disappointing bankers and promoters. Commercial banks have achieved profit growth of just 3.75 % in the first quarter of this fiscal compared to 44% of the same period of the previous fiscal as many banks have recorded negative growth in this review period. Profit of commercial banks dipped in this fiscal as the cost of deposit collection went up following the crisis of loanable funds in the mid of the previous fiscal. Average interest rate spread - gap between lending rate and deposit rate - of commercial banks was witnessed at 3.96% in the review period compared to 4.2% of the corresponding period in the last fiscal. This means banks have less margin in interest rates that they can charge to borrowers and pay to depositors. Interest income is considered the major source of income for banks. Commercial banks garnered attractive profits in the first quarter of the previous fiscal as banks were following an aggressive lending policy along with mandatory provision by Nepal Rastra Bank (NRB) to increase paid up capital to Rs 8 billion from Rs 2 billion. Banks landed in loanable funds crisis also called credit crunch by the middle of the previous fiscal due to their aggressive lending policy. This was exacerbated by the exerted pressure on banks to maintain credit cum core capital to deposit (CCD) ratio. As per regulatory rules, banks can lend only up to 80% of the sum of deposit collection and their core capital (tier 1 capital). Banks started collecting deposits at a higher interest rate to maintain CCD as well as for loan expansion. However, demand for loans came down due to the high interest rates which ultimately hurt profits. Banks have raised the interest rate in lending along increase in interest in deposit. Despite offering attractive interest rates on deposit, banks were unable to attract significant deposits as the source of deposits is limited in the country with government expenditure being low, remittance growth plummeting, and foreign direct investment in a dismal state. “The limited source of deposits has crippled the lending capacity of banks,” said Bhuvan Kumar Dahal, CEO of Sanima Bank.

Bleak picture

The first quarter result of banks paints a bleak picture of the country’s financial market. Dozens of banks recorded negative profit in the review period, namely Mega Bank, Siddhartha Bank, Nepal Bangladesh Bank, Nepal Bank, Kumari Bank, Global IME Bank, Agricultural Development Bank, Himalayan Bank, Citizens Bank, Prabhu Bank, Bank of Kathmandu and Sunrise Bank. Profit growth of Mega Bank declined by 44% followed by Siddhartha Bank at 39%, Nepal Bangladesh Bank at 31%, Nepal Bank at 20% and Kumari Bank at 18%, as per the financial statements published by the respective commercial banks.

Blame game

The situation of the crisis of loanable funds became a blame game between NRB and bankers. Economists and bankers blame the central bank for raising paid up capital requirement of the banks without analysing the size of economy and potential economic activities in the country. Authorities from the central bank also admit that NRB had raised the paid up capital of banks with the expectation that the resilience of the banks would be strengthened and their lending capacity would improve. Following the paid up capital rise, banks have also started lending aggressively to keep pace with the profit growth they were achieving in the past. Anil Keshary Shah, President of Nepal Bankers’ Association and CEO of Mega Bank said that the interest rate in deposit and credit both are high, and needs to be brought down to an ideal zone. “High interest rates in loan push back the economic activities and affect economic growth,” said Shah. However, the central bank blames bankers for their rampant lending policy in non-productive sectors like real estate and automobiles.

Interest rate to remain high throughout the year

Deposit and credit mobilisation from commercial banks further slowed down in this fiscal. Commercial banks have mobilized Rs 65 billion in loans in the first quarter against deposit collection of Rs 43 billion. It indicates that banks are eager to expand loans to maintain profits. However, lack of adequate deposit sources will not allow them to move forward. Loan expansion and deposit collection increased by 4% and 2.06 % respectively in the first quarter of this fiscal compared to 6% and 4% in the corresponding period of the previous fiscal. Sluggish deposit collection forced banks to raise interest rates on deposits which in turn raised the ‘cost of funds’ of the banks and adversely affected profits in the first quarter. Now banks are no more encouraged to expand loans which could affect private sector lending growth target of 20% set by the monetary policy of this fiscal. Loan expansion of commercial banks is expected to be sluggish throughout the year as a majority of banks have expanded loans up to the permissible credit to core capital cum deposit (CCD) ratio of 80% in the first quarter of this fiscal. According to the first quarter financial statements published by commercial banks, dozens of banks have crossed the CCD level of 77% which means they are not in a position to expand loans because of possible chances of withdrawal of deposits as well as Nepal Rastra Bank (NRB) monitoring the CCD of the banks every week. Of the total 28 banks in operation, three banks have been maintaining CCD below 70% which include Standard Chartered Bank, government-owned Rastriya Banijya Bank and Nepal Bank. Banks are more cautious towards loan expansion as aggressive lending in the last fiscal pushed them towards a crisis and almost all banks had breached the permissible CCD level allowed by the central bank. Loan expansion has slowed down in the first quarter of this fiscal compared to the same period of the previous fiscal. The central bank, during half-yearly review of the monetary policy last year, had introduced a provision allowing banks to not factor 50% of productive sector loans while calculating CCD. That provision was extended to the first quarter of this fiscal. Along with the special provision ending, banks have again come under pressure to maintain their CCD ratio. On the other hand, a large chunk of funds will be withdrawn from banks as the deadline for the submission of the first tranche of the income tax is approaching. Taxpayers have to submit the first installment of income tax (40% of the annual estimated income tax) by mid-January, which will exert pressure on banks to maintain CCD. Currently, average CCD ratio of the banks is 76%. Though many believe that the election expenses helps banks to collect deposits, a large chunk of funds will be also be withdrawn for submission of tax returns which does not paint an optimistic picture for banks until government expenditure starts to gain momentum in the last quarter of the fiscal.