Twenty of Nepal's banks collectively earned around Rs 19 billion in profit over a single three-month period, even as interest rates on both savings deposits and loans continued to decline, according to reports published by Setopati and OnlineKhabar. On the surface, the figures point to a 35 percent jump in the sector's profitability. But the reports caution that much of that growth reflects accounting treatment rather than genuinely stronger business, with the banks' actual profit for the period estimated at only around Rs 14 billion.

The gap between the headline number and the underlying reality has become the central point of discussion around the quarterly results, raising questions about the quality of the banking sector's earnings at a time when both savers and borrowers are seeing lower rates across the market.

Accrued Interest Behind the Headline Growth

According to OnlineKhabar, the 35 percent profit growth is largely attributable to banks being allowed to count accrued and uncollected interest as income. In simple terms, interest that borrowers have incurred on their loans but have not actually paid in cash is being booked as revenue.

That accounting treatment matters for several reasons:

  • Interest that has accrued but remains uncollected does not add cash to a bank's balance sheet.
  • If borrowers ultimately fail to pay, the booked income may never materialize.
  • Counting such interest lifts reported profit in the short term without a matching improvement in the banks' actual earning capacity.

Excluding the effect of this accrued interest, the report estimates that the twenty banks' real profit for the period stands at roughly Rs 14 billion, a figure markedly lower than the Rs 19 billion headline number. The distinction is important for anyone reading the results, since it suggests the pace of profit growth recorded in the three-month window overstates the income the banks have actually collected from their customers.

Provisions Fall as Bad Loans Rise

The second factor flagged in the reports is the sharp fall in provisioning. The banks' provisioning has dropped by more than 2.5 times, even as the volume of bad loans has increased.

Provisioning refers to the money banks set aside from their earnings to cover loans that may not be recovered. When loan defaults rise, banks are normally expected to increase these allocations to cushion themselves against future losses. The reports indicate the opposite has happened in this case: non-performing loans have grown while the amount set aside against them has fallen steeply.

Because provisions are deducted from profit, a lighter provisioning burden has an immediate and mechanical effect of boosting the bottom line. The combination described in the reports, rising bad loans alongside a provisioning charge cut by more than two and a half times, points to a profit figure supported less by core performance and more by a reduced cushion against potential loan losses.

Core Income Stagnant as Rates Decline

The reports also note that the banks' core interest income has not grown much. This is significant because interest income from lending is the principal engine of a Nepali bank's earnings, and stagnant core income indicates that the underlying lending business has not expanded in step with reported profit.

The profit growth has come at the same time that interest rates on savings deposits and loans have declined. Falling deposit rates reduce the returns available to savers, while falling lending rates reduce the income banks generate from their loan books. In an environment where both sides of the balance sheet are yielding less, the weak growth in core interest income is consistent with the reports' broader picture of a sector whose headline profits are running well ahead of its fundamental earning power.

What the Numbers Signal

Taken together, the figures reported by Setopati and OnlineKhabar sketch a banking sector that looks profitable on paper but faces mounting questions beneath the surface:

  • The Rs 19 billion headline profit includes a substantial component of accrued and uncollected interest, without which earnings fall to around Rs 14 billion.
  • Provisioning has fallen by more than 2.5 times at a time when bad loans are rising, easing pressure on the bottom line rather than reflecting stronger asset quality.
  • Core interest income, the sector's most fundamental source of earnings, has grown only marginally even as rates on savings and lending have moved down.

The reports suggest the 35 percent profit growth should therefore be read with these caveats in mind. Until uncollected interest converts into actual receipts and loan recovery improves, the distance between reported profit and real earnings is likely to remain a key point of scrutiny around the sector's results.