Rate of Return of Banks Declining

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Rate of Return of Banks Declining

January 25: The rate of return of banks is headed on a downhill path. As the profits of banks declined due to their failure to expand business amid liquidity crisis and the stiff competition among the banks as well as regulatory provisions, the rate of return of banks has also declined.

According to the Nepal Bankers Association, the financial statements of commercial banks as of the second quarter of the current fiscal year show a drop of 11.73 percent on the return on equity (ROE) of commercial banks in an average.

During the same period last year, the ROE of banks was 12.45 percent. Compared to mid-January last year, the ROE of nine banks decreased in the current fiscal year, while there has been an increase in ROE of 12 banks.

As of mid-January this year, the net profit of Agricultural Development Bank decreased by 109 percent compared to the previous year and remained at minus 128.9 million rupees, making its ROE negative. NIC Asia Bank has the highest ROE of 26.25 percent by mid-January. NIC's ROE increased by 3.6 percentage points compared to last year. Nepal Investment Mega Bank is yet to publish its financial statements for the second quarter of this year.

President of Nepal Bankers Association and Chief Executive Officer of NMB Bank Sunil KC said that the rate of return is decreasing as the profitability of banks has been affected due to various factors. Addressing a press conference, KC said, “Banks provide most of their income to depositors and borrowers. Because of this, the rate of return of banks is decreasing.”

Due to the Covid-19 pandemic and the Russia-Ukraine war, the banks have been unable to expand their business. Similarly, the increase in bad loans of banks has also affected their profit. The total bad loans of banks increased to 2.29 percent till mid-January of the current fiscal year, which was 1.09 percent last year.

Anil Sharma, Chief Executive Officer of NBA, said that even though banks are accused of earning only profit, the figures state otherwise. He said that while the income of the banks from interest increased by 68 percent in the six months of the current year, their expenses on interest increased by 84 percent.

According to Sharma, in the previous year, the commercial banks distributed an average of 14.3 percent dividend, but in the last year, they could give only 10.76 percent and the ROE was 24.42 percent in the year 2069/70, which was limited to 11.73 percent last year.

The Confederation of Banks and Financial Institutions (CBFIN), the umbrella organization of bank investors, also drew the attention of Nepal Rastra Bank, saying that the return of banks has been decreasing since a year and this has started to discourage investors.

In the report which was submitted after studying the condition of the banks since 2073, the rate of return of banks and financial institutions has been continuously decreasing and to manage this challenge, NRB has been requested to allow the interest rate to be determined according to the concept of open market, not to limit the spread rate, and not to limit the premium fee. According to CBFIN’s report, the return on investment of banks increased from 19 percent in 2068 to 23 percent in 2073. After that, it dropped to 12 percent in the year 2077.


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