‘Banks working on low return on equity’

Kathmandu, August 21

Simply looking at average profit growth of 18 per cent in the last fiscal may not give a clear picture of the situation facing commercial banks in the country, as explained by bankers.

“The average return on equity (RoE) of commercial banks stood at 14.5 per cent in the last fiscal year 2017-18, which was the lowest in the last five years as the banks could not keep the momentum of profit growth after the increment in paid-up capital,” said Prithvi Bahadur Pande, chairman of Nepal Investment Bank. Average RoE of the banks was as high as 18 per cent before the regulatory paid-up capital requirement hike in fiscal 2015-16.

Pande’s statement has come at a time when banks have come under fire for booking profit despite ‘reeling under immense crises of loanable funds’ in the last fiscal, which resulted in the effective lending rates soaring to as high as 19 per cent. However, according to the central bank, the weighted average of the lending rate in last fiscal stood at 12.42 per cent against weighted deposit rate of 5.81 per cent.

Bankers claim they are being targeted unnecessarily despite complying with all the regulatory provisions. “Traders claim their businesses have become unviable because of high lending rates, but look at our return on investment … even Nepal Electricity Authority has fixed the power purchase agreement rate to ensure no less than 17 to 18 per cent RoE for investors,” said Pande.

While the central bank has made various interventions with an aim to bring down the spread rate, bankers claim the compliance cost for the banks has remained high.

“The regulatory body has instructed us to open branches in every local unit and banks must comply with the provision of annual rating by an acclaimed credit rating agency, among others,” stated Pande.

As if the situation was not complicated enough, bankers say that compared to earlier balance sheets published as per the regulatory requirement of the past, the profit of banks seem slightly higher in the ‘statement of financial position’ of the banks prepared based on Nepal Financial Reporting Standards.

The two reports vary as the requirement of loan-loss provisioning and asset valuation, among others are accounted for and reported differently.

“It’s easy to take aim at the banks because they are so transparent, while other business entities are not required to disclose their financial statements and are shielded from public scrutiny,” said Pande.

But traders and industrialists believe banks cannot exploit the borrowers to meet the target of return set by their board of directors.

“Most importantly, banks should be operated efficiently and their sole focus should be to serve the economy in which businesses can grow, which is a must for sustainability of banks,” said Om Prakash Sharma, president of Birgunj Chamber of Commerce and Industry.

The central bank officials said they were monitoring the situation closely and would take appropriate action to stabilise the interest rates. Nara Bahadur Thapa, executive director of NRB, said that the high lending rates and high deposit rates are both unhealthy for the economy. “However, while analysing the profit of the banks, one must look into the RoE and return of assets of the bank.”

Average RoE of class ‘A’ banks

2013-14…………………..16.6pc

2014-15…………………..18.1pc

2015-16…………………..18.1pc

2016-17…………………..15.4pc

2017-18…………………..14.5pc

Source: Calculated from financial statements of commercial banks