Commercial Banks average net interest spread below five per cent

KATHMANDU, AUG 19:

Despite the growing interest spread, most commercial banks have managed to bring the net interest spread down to below five per cent.

The average net interest spread of commercial banks increased to 4.4 per cent in the fourth quarter of last fiscal year, according to the recently published unaudited financial reports of commercial banks. In the corresponding quarter of the last fiscal year, the net interest spread of commercial banks stood at 3.7 per cent on average.

Net interest spread refers to the difference between the rate at which financial institutions lend funds and the rate at which deposits are raised. Thus, the higher the spread, greater is the profit.

However, a large spread rate only pinches into the income of both the borrower and depositor. Nepal Rastra Bank (NRB) had announced during the monetary policy that financial institutions will have to maintain a net spread of five per cent within a certain to-be-specified-in-the-future period.

Among the 30 commercial banks that have already published their fourth quarter financials, the net spread of only seven banks is above five per cent.

“NRB will only direct banks if their action of charging high interest on loans and offering low interest for deposits starts to affect financial stability,” said spokesperson for NRB Bhaskar Mani Gyanwali.

Nepal Bank Ltd has the highest spread at 6.35 per cent, while Janata Bank has the lowest at 2.92 per cent. Nepal Bangladesh Bank, Kist Bank, Lumbini Bank, Nabil Bank, Nepal Investment Bank and Everest Bank are those with a spread higher than five per cent. Agriculture Development Bank, Rastriya Banijya Bank and Himalayan Bank have not published the interest spread.

“Gradually, banks are themselves becoming aware about the changes in interest rates and the effect on liquidity,” he added.

“Though we did not publish the spread rate it is only a few decimal points above five per cent,” said CEO of Rastriya Banijya Bank Krishna Prasad Sharma. In the fourth quarter, the bank finally recorded a positive net worth after more than a decade.

The three public banks that have the largest deposit bases notoriously offer measly deposit rates and do not offer concessions in lending rate.

“The cost of operation also needs to be compensated by lending rate so it appears that banks are enjoying huge profits by charging high from borrowers and giving low rates to depositors,” pointed out Sharma.

The generous interest spread has even contributed in surging interest income of commercial banks by 36 per cent in the fourth quarter. Net interest income shows the difference between the interest received from its lending activities and expenses made to pay for borrowing. It is the income generated from purely banking activities.

Last year 30 banks earned a total interest income of Rs 20.1 billion in comparison to Rs 13.3 billion earned a year ago.

Source: THT