A new provision for the central bank has caused concerns about the sustainability of banking business since it is expected to clean up around Rs. 15 billion off the net profit of commercial banks and decrease the returns to a record low of around 11 percent.
Bankers have started to create doubts about the prospects of the banking sector after a sweeping change made by Nepal Rastra Bank, the central bank, to interest spread calculation method last week.
Before the revision of the formula, interest spread used to be calculated by deducting deposit rate from the sum of lending rate and the interest earned from government securities. Based on this, average interest spread stood 4.3 percent in mid-July, which was less than the regulatory requirement of 4.5 percent.
Around 28 commercial banks will generate returns of 15.5 percent in 2018-19, which ended in mid-July. However, if the new interest spread calculation is applied, the net profit will come down to around Rs 46.4 billion and return on equity will slump to 11.9 percent, as per the calculation made by the NBA. Gyanendra Prasad Dhungana, NBA President and Nepal Bangladesh Bank CEO said that this shows the extent of losses they will have to incur. He added that the central bank should not have become so harsh on them especially at a time when the overhead costs are jumping because of the need to step up IT compliance and the government’s request to set up branches in all 753 local bodies.