Net interest income of banks increase
KATHMANDU, NOV 29:
As banks are lending at a higher interest than what they are paying for deposits, increased net interest income has contributed substantially to the profit growth of commercial banks in the first quarter.
The net interest income of banks has grown by more than 25 per cent in comparison to the corresponding period of last fiscal year, according to the first quarter’s unaudited financial data of commercial banks. The net interest growth prevented profits from falling victim to the higher amount of provisioning against probable loan loss.
The net interest income of banks stands at around Rs 9.5 billion as of mid-October, which was Rs two billion less a year ago.
As banks have slashed deposit interest rates while lending interest rate is still high, net interest income tends to go up. The net interest spread on average has increased to about five per cent in the first quarter, which was at 3.2 per cent last year.
Net interest income is simply the difference between revenues generated by interest-bearing assets such as loans and interest-burdened liabilities such as deposits.
As banks have become aggressive in terms of lending in the first quarter, deposit growth rate has cooled down. The smaller deposit growth on one hand and increased lending on the other has surged the interest income of banks. In the first quarter, deposit grew by 1.6 per cent, that is, Rs 41.6 billion, while credit increased by 5.1 per cent, which means Rs 17 billion was loaned by banks during the period.
“Increased interest income from loans in comparison to interest expense for deposits have contributed in increased profits this season,” said vice president of Nepal Bankers’ Association Upendra Poudel.
Despite all the increased liquidity, banks have not revised the lending rate much, citing the increased cost of operation. Moreover, the low return on alternative investment instruments –– especially government securities and inter bank lending –– has affected the income of the banks.
The increased interest income signals that the income generated by the banks is through their core banking activities –– collecting deposits and floating loans for interest.
Moreover, decreased cost of fund has also contributed to the expanding profit. The average cost of fund for the last quarter came down to 6.5 per cent from 8.6 per cent last year.
Though increased net interest might be good news for the banking industry, increased non performing assets (NPA) is worrying. The average NPA has grown to about three per cent from 1.96 per cent a year back. NPAs are bad loans that do not yield any income for the banks in the form of principal and interest payments. Moreover, provisioning for them eats into their income.
Likewise, the provisioning for possible loan loss has grown by about 70 per cent in the review period. Loan loss provisioning reached about Rs 2.4 billion in the first quarter which stood at about Rs 1.5 billion a year back.
Source: THT
