KATHMANDU: The profits of banks and financial institutions dropped by over 15 percent as of mid-May in the current fiscal year due to the decline in economic activities and weak loan recovery. The slump in economic activities led to a decline in the banks' credit investment and an increase in the amount set aside for risk management, which impacted profits.

According to Nepal Rastra Bank (NRB), banks earned a net profit of Rs 53.19 billion by mid-May, which is 15.03 percent less than the Rs 62.6 billion earned during the same period last year. However, compared to mid-April of the current year, the profit of banks and financial institutions increased by 19.08 percent.

On May 26, NRB issued a directive that only 1.20 percent risk provisioning is required for good loans. The increase in the amount that banks must set aside for risk has also affected profits. By mid-May of this year, banks set aside Rs 78.58 billion for risk management, 46.56 percent more than the same period last year.

Currently, NRB requires banks to set aside 1.20 percent for good loans, 5 percent for micro-monitored loans, 25 percent for sub-standard loans, 50 percent for doubtful loans, and 100 percent for bad loans.

The profit of finance companies decreased by 63 percent compared to mid-May last year. In the last 10 months of the previous year, finance companies made a profit of Rs 1.14 billion, but this year, it has been limited to Rs 41 million. The amount that finance companies have to set aside for risk management increased by 43.78 percent.

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

According to NRB, the profit of development banks was Rs 4.29 billion by mid-May 2023, but it decreased by 2.85 percent to Rs 4.17 billion in 2024.

By mid-May of this year, deposits in banks and financial institutions increased by Rs 443.80 billion (7.8 percent), while lending increased by Rs 225.24 billion (4.7 percent). Banks’ 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 this year due to non-recovery of loans.

Former President of Nepal Bankers Association Bhuwan Kumar Dahal stated that when economic activities slow down, bad loans of banks increase, affecting profits. "Banks have to set aside a large amount of money earned in provisioning," he said.