Economy

Economic turmoil on, banks still rake it in

Published by Octron on July 6, 2010

Commercial banks are expected to see a rise in their profits this year despite an acute liquidity crunch seen in the second half of the fiscal year. Nepal Rastra Bank (NRB) concluded on the basis of statistics collected as of June that bank profits would exceed Rs. 15 billion. They had raked in Rs. 14.14 billion during the last fiscal year 2008/09. A senior central bank official said that banks would be witnessing a rise in total profits as a result of their massive lending during the first half of the current fiscal year. There are 27 banks in the country.

The banks issued loans amounting to Rs. 70 billion from mid-July 2009 to mid-January 2010. They could keep their profits up as they also increased the interest rate. Their profits as of mid-April 2010 amounted to Rs. 10.31 billion. During the third quarter of the fiscal year, profits had gone up by Rs. 3 billion. “As the banks could recover more loans in the fourth quarter and the interest rate also went up, they are likely to make a profit of Rs. 5 billion in the fourth quarter,” said the NRB source. Bankers, however, said they could not confirm the exact amount of profits they would be earning this year. “Profits may drop in the second half of this year compared to the first half,” said Sashin Joshi, president of the Nepal Bankers Association.

Banks witnessed fluctuations in their transactions this year due to the liquidity crunch and a balance of payments deficit. They stopped new lending for real estate, shares and hire purchase as a result. They had to go for inter-bank lending by offering a high rate of interest and they also increased the interest on deposits as they failed to attract adequate deposits. Following the limitation imposed on issuing credit to the real estate sector, banks with high exposure to the sector had to cease lending. Banks with low exposure to real estate are also lending cautiously as deposits have stagnated. Those who had already taken loans were also compelled to pay increased interest rates.

The next year will be tough for the banking sector. Despite a growth in deposits, they may not be able to issue loans without restrictions. The central bank is sure to keep a close watch on lending as it has been the main reason behind the liquidity crunch. Deposits are estimated to cross Rs. 600 billion by the end of the current fiscal year. This means that only Rs. 20 billion has been collected in the second six months of the current fiscal year. With the cash crunch and other symptoms of an economic crisis prevailing, the central bank is unlikely to loosen its strict measures on lending. Finance secretary Rameshwor Khanal hinted at a programme held on the budget on Saturday that the measures taken to stabilise the economy would continue. Khanal is also a board member of NRB.

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