See how Nepal Bangladesh Bank & Standard Chartered have more risk-free income; and how government-owned banks have risky income (Exclusive Study)

Taking deposits and lending money is the basic function of a commercial bank. Banks charge higher interest on the money it lends than the interest it pays on deposits. The difference between interest earned and paid is how banks earn their core income. This income is called net interest income. Funding Income and Non-funding Income The income of banks in the form of net interest income is also known as “fund-based income” or “funding income”. However, interest income is not the only way banks earn. In addition to lending and depositing money (which is the core operation of a bank), banks also provide a number of other services like credit and debit cards, internet banking, mobile banking, locker services, foreign currency exchange services etc. Banks charge fees for processing loans, card services, and a host of other services. For all the services offered, banks charge certain fees. Income earned through fees and charges is called “non-interest income” or “non-funding income”. Risky Income and Risk-free Income If we analyze the incomes commercial banks have earned in the third quarter of the ongoing fiscal year, we can see that net-interest income accounts for 77.24% of the overall banking income. Thus, net interest income plays a vital role in a bank’s performance. However, net-interest income is always associated with a risk factor. Contribution of non-funding income also can’t be ignored since funding income has very much high risk. If a bank’s income has more non-interest income or non-funding income, then we can consider that the particular bank has more diversified portfolio of income producing activities which signals low risk. Commercial Banking Industry’s Income (as of Q3 FY 2073/74) As of third quarter this year, the total income of the commercial banking industry is Rs 75.78 arba. The funding income of industry is Rs 58.53 arba occupying 77.24% and non-funding income remains at only Rs 17.25 arba which is 22.76% of the whole industry income. This means that more than three-fourths part of income generated by commercial banks is risky and is highly dependent on deposits and loans. This shows the extent liquidity crunch will have in a bank’s income. However, this risk is minimized in case of Nepal Bangladesh Bank Limited (NBB) and Standard Chartered Bank Limited (SCB), which have higher portion of income coming from risk-free sources. Risky income accounts for only 58.98% of income of NBB (as opposed to ~77.24% of industry). Likewise, 41.02% of income of NBB is risk-free and not directly affected by increase/decrease in deposits and loans. On the other hand, income of government-owned banks has been found to be riskier. Rastriya Banijya Bank Limited (RBB), Nepal Bank Limited (NBL) and Agricultural Development Bank Limited (ADBL) have the highest portion of income attributed to fund sources. While this means that these banks earn more from their core banking operations, it can also mean that providing other services is not their main objective. Moreover, this also means that these banks may have been providing similar services at a lesser charge than banks like Nepal Bangladesh Bank, Standard Chartered, Prime Commercial Bank and Laxmi Bank.