Banks’ Profit Surge: Banks Ride Policy Relief to Record Gains

Nepali commercial banks reported sharply higher profits in fiscal year 2024/25, aided by relaxed monetary policies, loan recoveries and higher fee-based income cushioning weak lending growth. However, rising non-performing loans (NPLs), asset-quality pressures, and an impending IMF-mandated review cast uncertainty over the sector’s sustainability.

According to unaudited financial statements, the country’s 20 commercial banks earned a combined profit of Rs 71.51 billion, a 43.37% increase from the audited Rs 49.87 billion in FY 2023/24. Sixteen banks reported higher profits, while four saw declines.

Drivers of the Profit Surge

Despite a liquidity surplus of nearly Rs 600 billion, credit expansion remained tepid with credit growth hovering at just 8%, well below the 13% growth target set by the Nepal Rastra Bank (NRB). Yet profits soared, largely due to a steep drop in loan-loss provisioning.

In its mid-term review of the monetary policy, NRB reduced the provisioning requirement for good loans from 1.1% to 1%, effective February 2025. The regulator also repeatedly extended restructuring and rescheduling facilities across sectors, including agriculture, energy and small and medium enterprises (SMEs). Similarly, in March, the central bank allowed banks to restructure contractors’ loans pending government payments, and in June, repayment periods for working capital loans were extended by two years. These regulatory relaxations helped banks cut provisioning for bad loans to Rs 28.5 billion in 2024/25, down from Rs 55.98 billion in the previous year. Overall income rose by more than Rs 7 billion, while provisioning costs fell by nearly Rs 31 billion, lifting net earnings by Rs 21.63 billion.

Bankers attribute the surge primarily to reduced provisioning. While some banks reported higher operating profits and others saw declines, fee income generally increased alongside rising expenses. The main driver of overall profit growth, therefore, was the drop in provisioning requirements. Meanwhile, non-performing assets remain elevated, higher than a year ago. "A large portion of directed lending in Nepal has already turned into non-performing assets, which continues to strain the financial system. With targeted regulatory reforms, the banking sector could regain stability and accelerate the broader economic recovery," said Anal Raj Bhattarai, a former banker.

Asset-Quality Concerns Rising

The underlying health of banks, however, remains fragile. NPLs rose to 4.1% from 3.74% last year, signaling deteriorating asset quality despite the profit surge.

Most banks were unsuccessful in recovery of their loans through collateral auctions. As a result, they had to convert repossessed properties into non-banking assets (NBAs). These NBAs jumped 42.13% last year to Rs 43.15 billion. Until such assets are liquidated, banks must transfer about half of post-tax profits (after bonuses and CSR allocations) into regulatory reserves. As a result, distributable profit remained far below headline figures.

The widening gap between audited and unaudited results is another worrying sign. In 2023/24, loan-loss provisions jumped from Rs 36.96 billion in unaudited reports to Rs 56.45 billion after audits—a 52.72% increase that cut profits by 22.3%. Similar adjustments were also seen in 2022/23.

Net Interest Income Weak, Fees Fill the Gap

Despite modest credit growth, net interest income (NII) slipped 1.08% to Rs 190.64 billion, as aggressive lending rate cuts amid surplus liquidity compressed spreads. Nearly half of the banks reported lower NII. Prabhu Bank saw the steepest decline at 39.47%, followed by Standard Chartered (-12.56%), Himalayan Bank (-9.99%) and Laxmi Sunrise (-7.99%). Declines were particularly acute for banks that lost spread concessions after mergers.

By contrast, Everest Bank (19.36%), Nepal Bank (16.82%), Machhapuchchhre (15.41%), Prime (11.92%), Citizens (11.20%) and NMB (11.14%) reported strong NII growth.

With spreads under pressure, banks leaned more heavily on non-interest income. Net fee and commission income rose 11.02%, net trading income gained Rs 3.26 billion and other operating income added Rs 2.42 billion. Collectively, non-interest revenue contributed Rs 9.21 billion in additional income.These results reflect a combination of improved economic activity and regulatory support. Rising letters of credit, imports and business transactions boosted fee income. While positive, sustainability will ultimately depend on genuine credit expansion.

"Key sectors such as hotels and manufacturing are showing positive growth, indicating that the economy is regaining momentum. I expect this revival to continue, particularly with the upcoming festival season likely to boost consumption and economic activity over the next two quarters,” said Bhattarai. “But for sustained growth, the central bank must be more flexible in restructuring loans."

Distributable Profits and Dividends

A major contributor to distributable profits was the recovery of Rs 13.62 billion in previously uncollected interest, which had been parked in regulatory reserves. This transformed an overall retained loss of Rs 9.36 billion in 2023/24 into distributable retained earnings of Rs 21.67 billion in 2024/25. Consequently, commercial banks are expected to declare average dividends of 12–13%, injecting liquidity back into the economy. NRB Governor Dr Biswo Nath Poudel has urged banks to hold annual general meetings (AGMs) promptly and release cash dividends to ease market liquidity pressures.

IMF-Mandated Review on the Horizon

Starting September 2025, the IMF requires an external asset quality review (AQR) of the top 10 commercial banks. The findings could challenge current optimism, especially if provisioning requirements are found understated.

Some bankers argue that collateral-backed lending in Nepal reduces risk. Others say that loans are often misused or serviced through unrelated income streams, raising hidden default risks and potential future provisioning spikes. The IMF review is part of Nepal’s commitments under its Extended Credit Facility (ECF) program, designed to ensure financial sector resilience. Analysts say the AQR could be a turning point, either validating NRB’s relaxed approach or exposing vulnerabilities that force a tightening cycle.

Bank Leads in Profits

Nabil Bank posted the highest profit of Rs 7.12 billion in 2024/25, followed by Nepal Investment Bank and Global IME, each earning over Rs 6 billion. Prabhu Bank reported Rs 5.44 billion, while Everest, Agricultural Development, Laxmi Sunrise, and Prime Bank earned Rs 4–5 billion.

Rastriya Banijya, Nepal Bank, Siddhartha, NMB, and Standard Chartered reported profits between Rs 3–4 billion. Sanima, Kumari, and Machhapuchchhre earned Rs 2–3 billion, while Nepal SBI, Himalayan, and Citizens posted Rs 1–2 billion. Four banks, however, reported a drop in profit. NIC Asia saw its profits plunge by 76.97% to Rs 160 million. Standard Chartered’s profit fell 7.51% to Rs 3.03 billion despite provision reversals. Nepal SBI Bank’s earnings also dropped 10% to Rs 1.8 billion, while Citizens Bank saw its profit decline by 2.3% to Rs 1.29 billion.

Short-Term Gains, Long-Term Questions

For now, the banking sector is enjoying a profitability rebound. But much of the surge stems from regulatory concessions and provisioning relief rather than organic credit growth. Rising NPLs, ballooning NBAs, and the upcoming IMF review cast shadows over the sustainability of these results.

"A full return to earlier stability will take time. There still are challenges such as high non-banking assets and non-performing loans,” Devendra Raman Khanal, CEO of Rastriya Banijya Bank, said. “In this regard, the government’s plan to establish an asset management company has injected optimism into the banking sector. Once operational, it will help ease the recovery burden on banks, enabling them to focus more effectively on their core functions."

This report was originally published in September 2025 issue of New Business Age magazine.