KATHMANDU: The profits of commercial banks dropped by over 15 percent as of mid-May in the current fiscal year (FY 2080/81) due to the decline in economic activities and weak loan recovery. The slump in economic activities led to reduced credit flow of banks and increased risk management provisions, which negatively impacted profits.

According to Nepal Rastra Bank, banks and financial institutions (BFIs) earned a net profit of Rs 53.19 billion as of mid-May this year, which is 15.03 percent less than the Rs 62.6 billion net profit earned in the same period last year. However, compared to a one-month period from mid-March and mid-April of the current fiscal year, profits of banks and financial institutions increased by 19.08 percent.

On June 26, Nepal Rastra Bank issued a directive requiring only 1.20 percent provisioning for good loans, affecting profits. Banks have set aside Rs 78.58 billion for risk management by mid-May of the current year, a 46.56 percent increase from the same period last year. Currently, provisioning is set at 1.20 percent for good loans, 5 percent for micro-monitored loans, 25 percent for bad loans, 50 percent for doubtful loans, and 100 percent for non-performing loans.

Meanwhile, the profits of finance companies have decreased by the highest margin of 63 percent compared to mid-May of last year. In the first 10 months of the previous year, finance companies had made a profit of Rs 1.14 billion, but this year it dropped to Rs 410 million. The amount finance companies have to set aside for risk has increased by 43.78 percent.

Similarly, the profits of commercial banks have decreased by 14.96 percent. Commercial banks made a profit of Rs 57.16 billion by mid-May of last year, but only Rs 48.60 billion in the same period this year.

The profit of development banks decreased by 2.85 percent, from Rs 4.29 billion in mid-May last year to Rs 4.17 billion in the corresponding period this year.

According to Nepal Rastra Bank, by mid-May of the current year, deposits in banks and financial institutions increased by Rs 444 billion (7.8 percent), while lending increased by Rs 225 billion (4.7 percent). Income was affected because banks could not provide loans in proportion to the increase in deposits. The distributable profit of 10 commercial banks was negative in the third quarter of the current year due to non-recovery of loans.

Former President of Nepal Bankers Association Bhuwan Kumar Dahal stated that when economic activity slows down, the bad loans of banks increase, affecting profits.

"Banks have had to set aside a large amount of money for provisioning," he said.