Nepal’s commercial banks recorded a 32 percent increase year-on-year in net profit in the last fiscal year, despite weak economic activity, sluggish credit demand and a sharp rise in excess liquidity in the banking system.

According to unaudited financial statements published by the country’s 20 commercial banks, their combined net profit rose to Rs69.78 billion in the fiscal year ended mid-July, from Rs52.79 billion a year earlier.

Bankers say the increase was driven largely by stronger loan recoveries in the fourth quarter, which allowed banks to reverse some impairment charges and reduce provisioning for potential loan losses.

The rise in profits comes as the wider economy continues to face weak demand. For the third consecutive year, banks have been holding large amounts of excess liquidity, private-sector credit demand has remained subdued, domestic industries have been operating at only around 42 percent of capacity, and the prolonged crisis in the cooperative sector has weighed on consumption.

Santosh Koirala, president of the Nepal Bankers’ Association, said the increase in profits did not reflect a significant expansion in lending.

“Loan disbursement showed negligible improvement over the fiscal year, resulting in only marginal gains in net interest income,” Koirala said. “The bottom-line growth is almost entirely driven by notable recoveries of bad loans.”

He said the improvement in loan recovery could indicate a gradual revival in real estate transactions and a greater willingness among borrowers to repay their debts.

The improvement, however, was uneven across the banking sector. Sixteen of the 20 commercial banks reported higher profits. Himalayan Bank recorded the largest percentage increase, with its profit rising by more than 1,100 percent from a low base. Three banks reported lower profits, while Prabhu Bank posted a net loss.

In terms of absolute profit, Nabil Bank was the largest earner, with a net profit of Rs7.90 billion, up 33 percent from Rs5.92 billion a year earlier. Kumari Bank followed with Rs7.38 billion, Global IME Bank with Rs6.22 billion and Everest Bank with Rs5.06 billion.

NIC Asia Bank reported the smallest profit, at Rs180 million, but this represented a recovery from a loss of Rs3.87 billion in the previous fiscal year.

Bank executives and analysts caution that the increase in profits does not necessarily signal a broad-based recovery in the banking sector.

Sudesh Khaling, chief executive officer of Everest Bank, said regulatory concessions introduced by Nepal Rastra Bank, including loan restructuring and rescheduling in selected sectors, had also supported banks’ balance sheets.

“While loan recovery improved for several large institutions, lowering provisioning write-offs, liquidity remains heavily trapped in the banking system while fresh credit demand is virtually absent,” Khaling said. “Banks cannot sustain profit growth over the long term unless underlying economic fundamentals improve.”

Despite stronger recoveries in the final quarter, the sector’s asset quality deteriorated. The average ratio of non-performing loans (NPL) rose to 5.35 percent at the end of the fiscal year 2025-26, from 4.51 percent a year earlier.

Five commercial banks reported NPL ratios above 7 percent. Prabhu Bank had the highest ratio at 15.55 percent, while Everest Bank had the lowest among the banks, at 0.49 percent.

At the same time, banks’ total provisioning for bad loans fell to Rs37.30 billion by July 17, from Rs44.69 billion a year earlier. The reduction in provisioning helped lift banks’ reported profits.

Net interest income, a key source of earnings for banks, increased by just 1 percent to Rs192.35 billion in the last fiscal year, from Rs189.84 billion a year earlier, reflecting the limited growth in lending.

Four banks ended the fiscal year with negative distributable profits, while 16 recorded positive distributable profits. Based on their net profits, banks had an average dividend capacity of 13.42 percent.

Banks also transferred Rs4.82 billion to regulatory reserves in the fourth quarter because of uncollected interest, in line with Nepal Rastra Bank rules requiring 51 percent coverage.

The sector’s average earnings per share increased to Rs19.96 from Rs16.42 a year earlier.

Bhuwan Dahal, former president of the Nepal Bankers’ Association, said the results showed a widening gap in the performance of individual banks rather than a uniform recovery across the sector.

“The fourth-quarter financial statements present a mixed picture. Banks that managed their portfolios prudently showed strong indicators across credit flow, recovery, and non-performing loans,” Dahal said. “However, several institutions saw no credit growth, poor recoveries, and elevated loan-loss provisions, causing their distributable profits to shrink.”

At the broader economic level, the financial and insurance sector is projected to grow by 9.16 percent in the fiscal year 2025-26, according to the National Statistics Office. The projected growth is 1.61 percentage points higher than in the previous fiscal year.

The NSO attributed the growth to increases in bank deposits and loan disbursements, as well as higher renewals of life and non-life insurance policies. It also cited increased value addition from the Social Security Fund, Employees Provident Fund, Citizen Investment Trust, stock market transactions and merchant banking activities.

The NSO revised its estimate for financial and insurance sector growth in the fiscal year 2024-25 to 7.55 percent, compared with 9.96 percent in the fiscal year 2023-24.

Despite the projected increase in output, the sector’s contribution to Nepal’s gross domestic product fell slightly to 6.72 percent in the last fiscal year from 6.78 percent a year earlier.

Meanwhile, nearly Rs1.5 trillion in excess liquidity was sitting in the banking system by mid-July. Steady remittance inflows, combined with weak domestic demand for loans, resulted in loanable funds accumulating throughout the fiscal year.

The large pool of idle funds, despite the increase in bank profits, underscores the disconnect between the financial sector’s earnings and broader economic recovery. Banks have more money available to lend, but businesses and households have remained reluctant or unable to borrow at the scale needed to drive a stronger expansion in economic activity.