Banks are optimistic of high second-quarter profits despite businesses being hit hard by the Tarai unrest and Indian embargo. 

Amid a general belief that bank profitability would be hurt due to the twin crisis of the earthquake and embargo this year, banks showed a net profit growth of 47 percent in the first quarter, and bankers have reported that they are on course to maintain the good profitability. 

Bankers said that two factors — increased investment by banks to cover the rising cost of businesses and the trend of providing extra loans to pay the interest — could be responsible for the good outlook. However, they said that they had not engaged in such practices. 

For example, Himalayan Bank Limited (HBL) said it posted an operating profit 

of  Rs1.26 billion during the first half of the current fiscal year against Rs920 million during the same period in the last fiscal year. Other banks have also expected their profits to remain at modest levels. 

HBL CEO Ashoke Rana said his bank increased profits by reducing costs and increasing the spread rate (difference in interest rates on deposits and loans) during the period.

“We  reduced the cost for banks to 2.2 percent and hiked the spread rate to 4.9 percent from 4.2 percent during the period,” he said. As per Nepal Rastra Bank’s directive, banks have to maintain their spread rate within 5 percent. During the first quarter, HBL had reported a net profit growth of 20 percent. 

Sunrise Bank is also expecting a good growth in profitability in the second quarter while posting a profit growth of 24 percent during the first quarter. “Despite the crisis caused by the Tarai unrest and embargo, most borrowers have paid interest on their loans,” said CEO Ratna Raj Bajracharya. 

“Most industrialists also have interests in trading, and the cash flow in trading has not slowed because they have been able to sell their products at higher prices to cover the increased costs from the embargo.” According to him, some traders may have profited from black marketing too, which may have enabled them to repay their bank loans. 

Bankers said there had been no significant decline in lending and recovery in trading businesses, but recovery has been difficult with regard to loans issued to construction businesses and hydropower, tourism and small and medium enterprise (SME) sectors.  

“The construction of hydropower projects have been halted which has affected loan recovery,” said Upendra Poudel, president of the Nepal Bankers’ Association (NBA). “SMEs also don’t have alternative sources of income like corporate houses which has affected their ability to repay loans.”

According to Poudel, his bank, NMB Bank, is also xpecting better profitability in the second quarter compared to the first quarter when their profit grew by less than 1 percent. 

“Recovery has been sound so far, and we expect a higher profit although it will be 

less than the potential in a normal business environment,” he said.   

Sanima Bank, which posted a net profit growth of 35 percent in the first quarter, is also expecting modest profit growth in the second. 

“As businesses were hit hard in November and December, growth will not be as expected, but will be modest,” said Sanima CEO Bhuvan Dahal.

According to the bankers, extended loan repayment deadline as per the directive of the central bank, and banks not requiring to make provisioning of such loans, would help the banks maintain profitability. 

In the latest directive, the central bank has allowed borrowers to repay their loan, instalment and interest until Mid-April, and banks could count such loan as good loans.