The two-year-long Covid-19 pandemic hit the economy and pushed many businesses to the brink of bankruptcy, but Nepal’s financial sector rebounded quickly and remained strong and resilient, according to the latest report from the central bank.
According to the financial stability report released by the Nepal Rastra Bank on Thursday, the profitability of the banking sector increased by 21.01% to reach 71.30 billion rupees in the last financial year ended mid-July 2021.
During the previous financial year, profitability fell by 20.61%.
Net profit of commercial banks increased by 16.60% to Rs 63.37 billion in the last financial year, compared to a sharp drop of 16.66% in the previous year.
All commercial banks posted profits in the last fiscal year.
The contribution of interest income was 81.39% of total income in the year under review, compared to 86.52% the previous year.
The pace of credit flows from banks and financial institutions increased by 27.76% in FY 2020-21, compared to growth of 12.32% in FY 2019-20.
Bank deposits increased by 20.50% in the 2020-21 financial year, compared to 17.27% in the pre-Covid period of the 2018-19 financial year, according to the report.
“Nepal’s banks and financial institutions remained reasonably healthy in terms of capital, liquidity and asset quality,” the report said. “Overall, the overall indicators of the financial system remained acceptable and the stress situation could not be noticed.”
Nepal’s economy is recovering from the shock of the Covid-19 pandemic. Economic activities have expanded alongside the easing of Covid-19 restrictions and the availability of vaccines in recent months.
As a result, credit to the private sector has increased in recent months, leading to an expansion in the money supply and upward pressure on asset prices, according to the report.
However, an increase in domestic demand in a context of rising oil prices should put pressure on inflation.
Anil Kumar Upadhyay, CEO of the Agricultural Development Bank and Chairman of the Nepal Bankers Association, says economic activities have increased, increasing the demand for funds in the market as the pandemic situation improves.
“But with the economic slowdown and high inflation, the situation is difficult. The government has taken control measures in time, such as restricting imports of certain goods, so the financial situation will not be as bad as expected,” he said.
“Rising demand for money and global inflation have created pressure on prices which has impacted cash management as most goods are imported with little domestic production. was unable to spend the investment budget on time as the inflow of foreign investment remained relatively weak,” he said. mentioned.
“The chances of an improvement in the liquidity crisis in the short term are less. We are facing economic imbalances due to import dependence and weak domestic production and exports. Control measures have been taken , including restrictions on the importation of certain goods,” he said.
“As we don’t have a rating of the country, big joint ventures and foreign investors are not investing in Nepal, which has had an impact on the money supply,” Upadhyay said.
According to the Central Bureau of Statistics, the growth rate of Nepal’s economy stood at 4.0% in the financial year 2020-21, compared to a negative growth rate of 2.1% in the last year. 2019-20 financial year.
According to the report, interest income is the main source of income for banks and financial institutions. The banking sector is still highly dependent on traditional credit and deposit mobilization activities.
The currency fluctuation gain was 2.38% in 2020-21.
“We could not opt for bonds, external loans, long-term resources and debentures. Low government capital spending has kept the market tight,” Upadhyay said. “The country depends on trade where imports are high and exports are low, which does not generate a value chain.”
By mid-July 2021, the number of banks and financial institutions had fallen to 133, including 27 commercial banks, 18 development banks, 17 finance companies, 70 microfinance institutions and one infrastructure development bank.
In addition, 19 life insurance companies, 20 non-life insurance companies, two reinsurance companies and several non-banking financial institutions and a postal savings bank operate in Nepal.
After the establishment of the merger statutes, 229 banks and financial institutions had been subject to a merger-acquisition process by mid-July 2021.
Commercial banks had 4,753 branches, development banks 1,023, finance companies 222 and microfinance institutions 4,685 branches as of mid-July 2021.
Branches of banks and financial institutions, excluding micro-finance institutions, serve about 5,065 people on average, according to the report.
There is a wide range of financial institutions operating, but no significant imbalances have been noted in Nepal’s financial ecosystem, the report says.
According to the report, there has been a significant expansion in the balance sheet of banks and financial institutions mainly due to the increase in deposits and credit.
“An increase in deposits is primarily due to an increase in banking habits, expansion of banking reach, wider adoption of information technology, and increased remittances,” the report said.
“A growth in credit issuance by banks and financial institutions is driven by the expansion of full-fledged banking services in local units, increased financial literacy and awareness supported by banks and financial institutions The likely pressure on the external sector may lead to tight liquidity conditions, leading to upward pressure on interest rates,” the report said.