See the performance of the commercial banks based on ICRA’s report

ICRA Nepal has published a performance update of the Nepalese Banking Sector. The report analyses the general trend in the banking industry of Nepal with a closer look at the performance of 28 commercial banks from the FY14 till the second quarter of FY18.

The major points of the report are mentioned below:

• During past 12 years, Nepalese banking industry has witnessed 2 spells of high credit growth (between FY07-FY09 and FY15-FY17). Both these credit growths have taken place during very low interest rate regime; in absence of strong countercyclical checks by the regulator.
• The process of merger between BFIs gathered speed after NRB rolled out revised paid up capital requirement in July/August 2015.
• In FY17, few large development banks themselves got acquired by class A banks leading to the decline in the size of class B industry as well.
• Only 2 commercial banks out of 31 (then) underwent merger while the rest resorted to equity infusion and/or acquisition of smaller BFIs (Class B and Class C) to meet the revised capital requirement.
• Credit growth rate has again picked up after Q1FY18, while deposit growth rate continues to decline. This is likely to given rise to another liquidity shock in near future.
• During past 3 years ending FY17, net interest income (NII) accounted for ~75% of total operating income of Class A banks while rest comprise of non-interest income (mostly credit linked activities like loan processing fees, Letter of credit/ guarantee commission, etc.).
• Shortage of lendable deposits pushed up the cost of funds, slowed down credit growth and hence affected NIMs and ROA. Moderation in ROA was also due to the dilution effect created from equity injection, as many players completed their last round of equity injection/capital retention towards FY17 end.
• Due to the disparity in credit and deposit growth, banks’ CCD ratio and liquidity position came under pressure by the first half of FY17. Second half of FY17 was characterized by banks focusing on attracting incremental deposits by offering better rates. This was done to support credit growth and prevent the breach of CCD ratio.
• Between FY01 to FY15, banking sector credit has grown by CAGR 19%, backed by CAGR 18% growth in deposits while between FY15 and FY17, industry average CRAR increased from 11.69% to 14.72%, against prevailing regulatory minimum requirement of 11%. The increase in CRAR was driven by growth in tier I capital from 10.10% to 13.35% over the same period.