The income aspect of banks revolves around receiving deposits and lending loans. In between this process, banks charge higher percentage of interest on the loan they disburse and provide lower interest rates on the deposit they receive. This gap that bank produces is its core income known as net interest income. The net interest income can also be referred as Funding income.
The era of banking has been evolving overtime. Today’s banks are not supposed to be relied upon net interest income as the only source of income. Therefore, banks provide variety of services such as credit and debit cards, internet banking, mobile banking, locker services, foreign currency exchange services etc. Banks charge fees for processing loans, providing card services, and hosting other services. Income earned through other fees except interest income is called as Non Funding Income.
As of second quarter of FY 2075/76, the net interest income i.e. funding income accounts for about 77.44% of the overall banking income. As mentioned earlier, net interest income, the core income of the banks, play a vital function in banks’ performance. However, net interest income is associated with several high level risks in the form of bad loans. In this scenario, investors and analysts should not overlook the component of non-funding income of banks. Non-funding income has a relatively low level of risk. The higher the non-funding interest income, the more diversified portfolio of income producing activities.
The proportion of Funding and Non Funding Income of commercial banks in the FY 2075/76 as of Q2
As of second quarter this year, the total income of the commercial banking industry is Rs 80.13 arba. The funding income of industry is Rs 62.05 arba occupying 77.44% and non-funding income remains at only Rs 18.08 arba which is 22.56% 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 to which liquidity crunch will impact the banking industry.
There are only 15 out of 28 commercial banks that have non-funding income proportion above 22.56%. The bank with highest proportion of non-funding income is Standard Chartered Bank (SCB). It has maintained a ratio of 65:34% between funding and non-funding income. Besides, Nepal Bangladesh Bank (NBB) has maintained a 70:29% ratio between funding and non-funding income. Ironically, state banks such as Rastriya Banijya Bank (RBB) and Agriculture Development bank (ADBL) which are supposed to be the epitomes for diversifying their services have the lowest contribution in the non-funding income sources.
The data table shows the absence of innovation in the banking industry of the country.