Non-Interest Income Share of Banks Rises Amid Weak Credit Growth

Commercial banks are increasingly earning from service charges and financial transactions as slower lending and falling interest rates have reduced their core interest income.

Banks have increasingly relied on alternative income sources such as remittance services, letters of credit (LCs), bank guarantees, card services, digital transactions, and trading in shares, gold and foreign currency.

Data from the 20 commercial banks show that the share of income from fees, commissions and trading activities has increased in the first half of the current fiscal year 2025/26, while the contribution of interest income has declined compared to last year.

The commercial banks earned a total operating income of Rs 126.35 billion as of mid-January of the current fiscal year (FY 2025/26). Of this, Rs 96 billion came from interest income, accounting for 75.89 percent of total operating income.

During the same period of the previous fiscal year (FY 2024/25), banks had earned Rs 117 billion in operating income, with interest income contributing 77.92 percent. This indicates that the share of interest income declined by nearly two percentage points year-on-year, while the contribution of fee, commission and trading income increased.

Banks primarily earn interest income by mobilizing deposits collected at lower interest rates into loans at higher rates. They also generate commission income from services such as issuing balance certificates, providing card and digital payment services, extending loans, and issuing letters of credit and guarantees. In addition, banks earn trading income through transactions in shares, gold and foreign exchange.

Bankers attribute the shift to slower credit growth, declining interest rates and the impact of rising non-performing loans, which have affected returns from lending.

In response, banks have expanded alternative income streams by prioritizing digital banking, mobile and card services, international trade finance, remittance services and treasury operations.

Former banker Parshuram Kunwar Chhetri said rising fee and commission income signals expanding economic activity. “Improvement in banks’ fee and commission earnings indicates that economic transactions are gradually increasing,” he said.

As of mid-January in the current FY, commercial banks posted a combined net profit of around Rs 30.5 billion.