KATHMANDU: The shrinking interest spread rate of commercial banks has reduced their interest income.
The net interest income of 32 class ‘A’ financial institutions has dived by about five per cent in third quarter of the current fiscal year as their income through interest has shrunk while interest payment is still large.
The net interest income that stood at Rs 23.2 billion in the corresponding period of the last fiscal year has come down to Rs 22 billion, according to the unaudited financial statements of the 32 commercial banks in the country. The 31 commercial banks that were in operation last year had recorded Rs 27.8 billion by the end of the fiscal year.
Likewise, average interest spread of the banks has come down to 3.4 per cent in the last quarter. Around this time last year, the average spread of banks stood at 4.8 per cent.
The net interest income is simply the difference between revenues generated by the interest-bearing assets such as loans and interest-burdened liabilities such as deposits. Interest income is the major income source of banks that determines the profit level of the bank.
The net interest spread refers to income received from its lending activities and expenses made to pay for borrowing. Spread being the profit margin for the banks, the higher the spread, the higher the income.
Due to contracting interest income and spread, banks also faced a massive decline in their profits last quarter. Due to the liquidity crunch two years back, banks had to scale up their deposit interest rate which in turn had led to a large increase in interest rates. The deposit rate went up as high as eight to 10 per cent for savings deposit which pushed the lending interest rate to as high as 18 per cent.
Banks have attracted enough deposits from the public but in the absence of viable projects to finance in recent days, their interest yielding assets have not expanded much. The super high lending rate discouraged borrowing by public as well.
Moreover, due to the cap on the real estate sector which is
the major borrower from banks, the sector cannot be provided much loans due to the central bank’s regulation.
The banks have excess liquidity which has led to a growth in the total interest payments in comparison to total interest yield. Banks have started dropping the interest rate –– especially on home and auto loans –– in order to stimulate the market.
According to bankers, due to the absence of viable projects to finance, they are more into investing in low-yielding government securities –– especially treasury bills.
The interest rate on government debt instruments being around one per cent has further hit their income sources. Among the 32 commercial banks, Nepal Bank has the largest spread of 5.49 per cent while Machchhapuchhre Bank has the lowest interest spread at 1.8 per cent.