Banks need to expand portfolio

HIMALAYAN NEWS SERVICE

KATHMANDU: The insignificant growth in operating profit and net interest income of the commercial banks is signaling need for banks to expand their investment portfolio in spite of net profit growth.

The commercial bank’s operating profit has increased by a nominal 2.43 per cent in the last quarter of fiscal year 2011-12, according to the recently published unaudited financial reports of the commercial banks.

Likewise, net interest income of the 32 commercial banks has also grown by a mere five per cent, even though their net profit had shown ascent of 12 per cent in the last fiscal year.

In the last quarter, operating profits of the banks stood at

Rs 16.41 billion while a year

ago they had earned Rs 16.02 billion. The operating profit

is the profit earned from a bank’s normal core business operations sans any windfall gains and losses.

Likewise, the class ‘A’ financial institutions have recorded net interest income worth

Rs 32.84 billion in the fiscal year 2011-12, which stood at Rs 31.26 billion in the same period of last fiscal year.

Net interest income is simply difference between revenues generated by interest-bearing assets like loans and interest-burdened liabilities such as

deposits.

“Shrinking growth rate of net interest income and operating profit signals that the banks are earning less from core banking activities – that is basically collecting deposits and floating loans for an interest,” said vice president of Nepal Bankers’ Association Upendra Poudel.

Following the last couple of years’ liquidity crunch the

increased deposit rate have attracted more than enough funds in the banks while lending is not taking off due to unfriendly investment climate

in the country, which has eventually hit the core income of

the banks.

“The source of income for the whole industry is shrinking while cost of fund is increasing due to inflation and the necessity of expanding business, in

addition, yields of alternate

investment portfolios including government securities and

interbank lending are at historic low,” he pointed out, stressing on the need of identifying

new investment areas for

the banks to improve core banking activity.

Increased deposits has made total deposits with banks amounting about Rs 870 billion while the total lending is less than Rs 70 billion. Such large scale mismatch of liabilities and assets tend to weigh down on profitability of the industry but for the time being the big banks and new banks have pushed the net profit of the whole industry.

The banks’ average cost of fund has not much changed in fiscal year 2011-12 compared to earlier likewise interest spread has also grown, in spite of, growing liquidity.

According to the data, average cost of fund last year was 8.4 per cent which has marginally declined to 8.1 per cent in a year. Average interest spread rate of the banks stands at 3.16 per cent which stood at 3.4 per cent in the fourth quarter of fiscal year 2010-11.