Kathmandu. While preparing the final financial statements of the last fiscal year, most of the commercial banks have adopted the strategy of not presenting the profit in the form of income for the current fiscal year.
Banks are preparing to reserve some income from this year for the coming year as the economy is yet to rebound at the expected pace, demand for new loans from the private sector is weak and the banking business will be challenging in the coming fiscal year.
In the last financial year, the expansion of new loans of banks has not been significant. However, the operating profit of most of the banks has improved after the recovery of loans issued in the past was better than expected.
The financial condition of the banks has become easier especially in Madhes Province, which has been considered weak for a long time, after the improvement in loan collection. This has not only reduced the pressure on bad loans but has also had a positive impact on profitability.
However, banks are not ready to take the current reform as a long-term trend. According to them, the environment for investment in the market has not yet been created.
Banks expect that the current fiscal year will be challenging as the industries and businesses have not shown much interest in taking new loans, plans for production and business expansion are limited and the investment morale of the private sector is still weak. That’s why they chose to save something for the coming year rather than showing all their income at once.
This time, the Nepal Rastra Bank (NRB) has allowed the interest maturing within 15 days of the end of the fiscal year to be included in the income of the previous fiscal year. Accordingly, the banks will be able to include the interest maturing in the balance sheet of the last fiscal year. While this has given banks the opportunity to show additional income, most banks are not in favor of showing all the effects of it right now. Instead, it is preparing to balance the volatility of profits by shifting some of the income that has already been raised to next year’s account.
According to banking experts, such a strategy reduces the risk of an unusually high profit in one year and a sharp downturn the next. Banks have tried to balance the current recovery with the uncertainty of the future, as the consistent profit will send a positive message to investors, regulators and the market.
The actual activity of the economy has also strengthened the vigilance of the banks. As the pace of production and business expansion in the market is slow, there is no sign of a significant increase in the demand for new loans. Some of the loans issued under the heading of restructuring, rescheduling and various concessions after COVID have not yet fully returned to normal. Therefore, the priority of the banks seems to be to maintain the regular recovery of old loans and stable the balance sheet rather than the expansion of new loans.
Nepal Rastra Bank (NRB) has set a target of 11 percent to expand credit to the private sector for the current fiscal year. The central bank has set a target of 7 percent economic growth, but the central bank is targeting relatively restrained credit expansion.
Last year, the target was 12 percent of credit expansion, but the actual growth was limited to about 6 percent. This also indicates that banks are not yet fully confident about the business prospects of the coming year.
If the loan is to be expanded as per the target, then the large amount of debt that matures and repays will have to be replaced with new credit. Given the current market conditions, banks have adopted a strategy to prioritize risk management and income stability over aggressive expansion in the coming year. As a result, all the profits received in the last fiscal year will not be made public immediately, but a part of it will be reserved for the next year.
