Management
Review & Analysis
In FY 2022-23, Nepal’s economic growth rate is estimated to be 2.16 percent in basic prices and 1.86
percent in producer prices.
In the budget of FY 2023-24, a target of 6 percent economic growth has been set.
In FY 2021-22, the average consumer inflation was 6.32 percent, which remained at 7.74 percent in FY
2022-23. However, considering the international policy direction, the decreasing trend of inflation,
the stable expectations of citizens regarding inflation and the base effect of prices, it seems that
inflation will remain within the limit of 6.5 percent in FY 2023-24.
Economic Outlook
(a) World Economy
The growth rate of global economy has slowed down due to escalation in interest rates driven by heightened inflation resulting from the ongoing Russia-Ukraine conflict, elevated oil prices and supply chain disruptions. These dynamics have reverberated throughout the global economic ecosystem, prompting a reassessment of growth projections and strategies.
International Monetary Fund (IMF) adopts a cautious stance in its outlook, foreseeing a modest increase in global economic growth over the forecast period. Specifically, IMF projects a slowdown in the world economic growth rate from its 3.4 percent expansion in 2022 to 2.8 percent in 2023, with a marginal uptick to 3.0 percent in 2024. Developed economies are expected to experience a deceleration in growth, with projections indicating a decrease from 2.7 percent in 2022 to 1.3 percent in 2023, followed by a slight rebound to 1.4 percent in 2024. Emerging and developing economies, despite having recorded a robust growth rate of 4 percent in the previous year, are anticipated to witness a moderation to 3.9 percent in 2023 before picking up to 4.2 percent in 2024.
Furthermore, regional forecasts highlight shifts in economic momentum, with India’s economy projected to expand by 5.9 percent in 2023 and 6.3 percent in 2024, following a growth rate of 6.8 percent in 2022. China’s economic trajectory, having grown by 3.0 percent in 2022, is expected to witness growth rates of 5.2 percent in 2023 and 4.5 percent in 2024.
In terms of inflation dynamics, while signs of improvement are emerging, risks persist due to uncertainties surrounding energy prices, geopolitical tensions, and potential policy responses. Inflation rates are expected to witness a gradual decline, with projections indicating a moderation from 8.7 percent in the preceding year to 7 percent in 2023, followed by a further easing to 4.9 percent in 2024. Developed countries are expected to witness a similar trend, with inflation rates projected to moderate from 7.3 percent to 4.7 percent in 2023, and subsequently declining to 2.6 percent in 2024. Similarly, developing countries are anticipated to see a gradual easing in inflation rates from 9.8 percent to 8.6 percent in 2023, followed by a decline to 6.5 percent in 2024.
Despite tentative signs of stabilization in prices, inflation remains above target levels, underscoring the necessity for continued vigilance and judicious policy responses to navigate the evolving economic landscape.
(b) Economy of the Country
In FY 2022-23, Nepal’s economic growth rate is estimated to be 2.16 percent in basic prices and 1.86 percent in producer prices. In previous financial year, internal liquidity was compromised due to high turnover deficit and the capital expenditure was not in line with the target, resulting in a decrease in the overall internal demand. As construction, mining and quarrying, manufacturing, wholesale and retail trade sectors were more affected, so the growth rate of these sectors is expected to remain negative. In the budget of FY 2023-24, a target of 6 percent economic growth has been set. It seems that the implementation of the reform action plans as mentioned in the budget and the capital expenditure according to the allocation will have a positive effect on the investment from the private sector and this will help to achieve the targeted economic growth.
As the monsoon is active, chemical fertilizers are readily available and the government has fixed the minimum support price for rice in time to remove price uncertainty, it is expected that the growth rate of the agricultural sector will be satisfactory in FY 2023-24. It seems that the increased export of electricity will help to reduce the trade deficit with India and improve the external sector and make the internal economy viable.
Tourist arrivals have improved since the beginning of FY 2022-23. With the reduction of the impact of Covid-19, the international travel standards have been relaxed and the business environment is becoming easier. The government of Nepal has announced that the year 2023 to 2033 will be celebrated as the decade of “Visit Nepal” and the expansion of infrastructure related to tourism including hotels and airports will increase the arrival of foreign tourists in the coming years.
As the external sector is improving and the interest rate is decreasing, it seems that the private demand will expand and this will help in making the economic activities sustainable. Remittance inflows are also expected to remain satisfactory as the number of people going to foreign jobs has increased. However, domestic demand has been affected to some extent due to the increase in the number of young people going abroad for foreign employment and studies.
Annual average consumer inflation is expected to remain slightly above the target range. In FY 2021-22, the average consumer inflation was 6.32 percent, which remained at 7.74 percent in FY 2022-23. Due to the reduction in domestic demand and the trend of decreasing wholesale prices in India, the pressure on prices seems to be reducing. Although the pressure on prices at the international level is decreasing, there is still a high risk situation due to the uncertainty in crude oil prices and the ongoing Russia-Ukraine war. However, considering the international policy direction, the decreasing trend of inflation, the stable expectations of citizens regarding inflation and the base effect of prices, it seems that inflation will remain within the limit of 6.5 percent in FY 2023-24.
Foreign trade has declined in FY 2022-23 as compared to previous year. However, the trade deficit has reduced by 15.5 percent to reach NPR 1,454.59 billion. Looking at the size of the budget, the current trend of remittances and the decreasing trend of interest rates, it is estimated that import and service trade will expand by about 16 percent in the coming year.
The trend of going for foreign employment in labor destination countries for new and better earning opportunities has boosted remittance inflow which remained satisfactory in FY 2022-23. In FY 2022-23, the remittance inflow has increased by 21.2 percent in Nepali rupees. In FY 2022-23, tourism income increased by 89.6 percent. It is estimated that the tourism income will be satisfactory in FY 2023-24 as well. Compared to mid-July 2022, the total foreign exchange reserves increased by 26.6 percent and reached NPR 1,539.36 billion as of mid-July 2023 which indicates that foreign exchange reserves are in a favorable position. Such reserves, in US dollars terms, has increased by 23.1 percent to $11.74 billion.
In FY 2023-24, the balance of payment position is expected to be in surplus despite increase in the current account deficit, considering the size of the budget and the proposed foreign aid, import and export trade and remittance flows. In FY 2022-23, the share of recurrent expenditure is 70.35 percent and the share of capital expenditure is 16.35 percent. Out of total allocated budget for current expenditure, 85 percent have been utilized whereas 61.4 percent have been utilized in case of capital expenditure. In present scenario whereby internal resources are limited due to low domestic savings, if resources can be managed through foreign investment, loans or aid, it will help to maintain the improvement currently observed in external sector and interest rates.
(c) Condition of Financial Sector
The year under review witnessed a notable surge in deposits held by banks and financial institutions, marking an increase of 12.3 percent which has outpaced the previous year’s increase of 9.0 percent. As of mid-July 2023, the distribution of deposits among current, savings, and fixed accounts stood at 7.7 percent, 26.6 percent, and 58.9 percent respectively. Comparatively, the distribution in the preceding year was slightly different, with figures at 8.9 percent, 27.6 percent, and 55.8 percent respectively. Institutional deposits constituted a significant portion, comprising 36.6 percent of the total deposits, slightly lower than the figure of 38.3 percent recorded as of mid-July 2022.
In contrast to deposit growth, loans extended by banks and financial institutions to the private sector experienced a more modest uptick of 3.8 percent during the review period. Such loans were increased by 13.1 in FY 2021-22. Notably, among these loans, the share allocated to the non-financial corporation sector was 62.7 percent, while the household sector accounted for 37.3 percent. These allocations were marginally different compared to the previous year, where the shares were 63.3 percent and 36.7 percent respectively.
Likewise, private sector credit from commercial banks has increased by 3.5 percent in FY 2022-23. As of mid-July 2023, 68 percent of the outstanding exposure of banks and financial institutions were against the collateral of real estate and 11.6 percent were against collateral of current ../assets (such as agricultural and non-agricultural products). As of mid-July 2022, such ratios were 66.4 percent and 12.3 percent respectively.
In FY 2022-23, outstanding loan of banks and financial institutions to the agricultural sector increased by 6.8 percent, loan to the industrial production sector increased by 8.3 percent, loan to the transportation, communication and public sectors increased by 21.0 percent, loan to the wholesale and retail sectors increased by 3.9 percent, and loan to the service industry sector increased by 3.7 percent.
(d) Capital Market Conditions
As of mid-July 2022, NEPSE INDEX was at 2009.5 which continued to maintain an upward trajectory to reach 2097.1 as of mid-July 2023. As of mid-July 2023, the market capitalization was NPR 3,082.52 billion which was NPR 2,869.34 billion as of mid-July 2022. Similarly, the number of companies registered in NEPSE has reached to 254 as of mid-July 2023 which was 234 as of mid-July 2022. Among the listed companies, the number of BFIs and Insurance companies are 136, while 79 are hydropower companies, 19 manufacturing and processing industries, 7 hotels, 6 investment companies, 4 trading companies and 3 others.
Among the listed companies, banks and financial institutions and insurance companies have a share of 63 percent in the market capitalization. Similarly, the share of hydropower companies is 13.2 percent, the share of investment companies is 7.1 percent, the share of production and processing related companies is 4.4 percent, the share of hotels is 3.4 percent, the share of commercial organizations is 0.5 percent and the share of other companies is 8.4 percent.
In FY 2022-23, ordinary shares worth NPR 179.88 billion, development bonds worth NPR 105 billion, bonus shares worth NPR 40.59 billion, debentures worth NPR 35.59 billion, mutual funds worth NPR 7.14 billion, right shares worth NPR 4.13 billion and FPO worth NPR 37.90 million have been listed.
by BFIs increased
Review of
Business Segments
I. Banking
Credit
Corporate Banking
A.Loan Portfolio
B. NPA %
C. Loan Mix
MSME Banking
A.Loan Portfolio
B. NPA %
C. Loan Mix
Retail Banking
A.Loan Portfolio
B. NPA %
C. Loan Mix
Treasury
Payment solutions
Remittance
Review of Bank’s performance
with management’s objectives
and strategies
Business done
during the year
I. Loans
During the review period, total gross loans and advances of the Bank stood at NPR 190.87 billion, which is 2.57% growth compared to previous year. Average growth rate of loans and advances of the commercial banks in the review period was 3.48%. In the review period, the Bank was able to increase its corporate credit portfolio by 5.53% and retail loan portfolio by 3.23%.
In line with the long term strategy of the Bank and to make the Bank the first choice of customers, Retail, Productive, and Small and Medium Enterprise Loans were prioritized by simplifying the procedures as per the requirement of customers, and by introducing various schemes with innovative features. The Bank invested NPR 9.96 billion in deprived sector lending which was 5.22% of outstanding loan as of mid-July 2023. Similarly, the priority sector lending (excluding eligible investments in energy & agricultural bonds) of the Bank at the end of reporting period was 27.64%.
During the review period, total loan loss provision of the Bank increased from NPR 3.78 billion to NPR 4.97 billion. NPR 1.19 billion was booked as impairment charges during FY 2022-23. The ratio of non-performing loan to total loans and advances stood at 2.01% as of mid-July 2023 whereas the ratio of non-performing loan over total loan loss provision stood at 129.70%
ii. Deposits
Total deposit of the Bank increased by 16.33% during FY 2022-23 and reached NPR 228.57 billion. Average growth rate of deposit of industry during review period was 11.86%. During the review period, saving deposit, call deposit, fixed deposit and current deposit of the Bank increased by 9.17%, 14.22%, 21.08% and 19.09% respectively whereas margin deposit decreased by 26.71%. The foreign currency deposit of the Bank stood at NPR 5.14 billion at the end of reporting period which has increased by NPR 3.80 billion from previous year. For the coming years, the Bank’s strategy shall be to focus on increasing saving deposits and number of deposit accounts. At the end of the review period, the Bank had 1,710,123 deposit accounts. The Bank’s current and saving deposit contributes to 32.25% of total deposit which was 33.82% during previous period. At the end of review period, the Bank’s market share in total deposit of the banking industry was 3.96% which was 3.81% in FY 2021-22. The Bank is able to maintain ratio of individual and institutional deposits as per the requirement of Nepal Rastra Bank, i.e. portion of institutional deposit is not more than 50% of total deposit.
The Bank is focused on collecting deposit from small depositors scattered all over the country in order to minimize the liquidity risk and concentration risk for the Bank and this is expected to improve the cost of deposit as well.
iii. Investments
During the review period, total investment of the Bank reached NPR 69.66 billion, an increment of 16.78% from previous year. Out of total investment, investment in development bonds, treasury bills, placements, equities, bonds of commercial banks and citizen saving bonds accounted 52.83%, 24.57%, 11.45%, 8.94%, 2.03% and 0.17% respectively.
The investment in shares and mutual funds at the end of reporting period stood at NPR 6.22 billion when valued at closing market price. The Bank also made investments in companies which can provide strategic advantage for the Bank in long run. During the review period, the Bank has earned NPR 3.61 billion as interest income from investment securities. Similarly, the Bank has earned NPR 147.81 million as dividend income on investment securities.
iv. Total Business
The total business size of the Bank at the end of reporting period was NPR 419.44 billion. The Bank managed to increase its total business by 9.64% during FY 2022-23, which was NPR 382.57 billion in FY 2021-22. Average growth rate of total business of the industry during review period was 7.86%.
Profit earned during the year
The Bank earned an operating profit of NPR 4.65 billion in the reporting period, an increase of 9.06% from previous year. Similarly, the Bank earned net profit of NPR 3.17 billion, an increase of 9.11% from previous year. The net profit to total assets (average) ratio of the Bank stood at 1.15% at the end of reporting period which was 1.18% in the previous year. The net profit to net worth (average) ratio of the Bank stood at 13.50% at the end of reporting period which was 13.82% in the previous year.
Income earned during the year
The Bank earned an operating profit of NPR 4.65 billion in the reporting period, an increase of 9.06% from previous year. Similarly, the Bank earned net profit of NPR 3.17 billion, an increase of 9.11% from previous year. The net profit to total assets (average) ratio of the Bank stood at 1.15% at the end of reporting period which was 1.18% in the previous year. The net profit to net worth (average) ratio of the Bank stood at 13.50% at the end of reporting period which was 13.82% in the previous year.
Breakdown of Interest income
During the review period, interest income of the Bank increased by 33.82%, and total interest income during FY 2022-23 stood at NPR 27.67 billion. Interest Income from loans and advances was NPR 23.79 billion, a 28.81% increment compared to previous year. Similarly, interest income from investments amounted NPR 3.61 billion, which was NPR 1.99 billion in previous year. In the review period, the Bank had focused on investing in high return yielding instruments which has resulted in such an increment in interest income from investments.
Cost incurred during the year
During the review period, the Bank had incurred total cost of NPR 25.34 billion which is an increment of 34.01% from previous year. Interest expense and personnel expense of the Bank constituted majority of cost of the Bank with 76.90% and 11.26% share of total cost. The Bank incurred fees and commission expense of NPR 347.46 million which has increased by NPR 61.57 million in comparison to previous year. The impairment charges of the Bank has also increased by NPR 580.09 million in the reporting period to stand at NPR 1.19 billion at the end of FY 2022-23. The personnel expenses of the Bank increased by NPR 167.22 million whereas other operating expenses has increased by NPR 89.59 million. The depreciation and amortization expense of the Bank has also increased by NPR 42.93 million and stood at NPR 448.01 million at the end of FY 2022-23. The non-operating expense of the Bank stood at NPR 101.19 million which was NPR 16.69 million in previous year.
Breakdown of Interest expense
During the review period, total interest expense of the Bank reached NPR 19.49 billion, which is an increment of 38.39% in comparison to that of the previous year. Total interest expense on deposit reached NPR 17.03 billion, a 37.53% increment in comparison to previous year. Interest expense on various borrowings made from Nepal Rastra Bank stood at NPR 725.03 million at the end of FY 2022-23 which was NPR 738.89 million in FY 2021-22. Similarly, interest expense on borrowing stood at NPR 451.52 million, which was NPR 89.71 million in previous year. The interest expense on debt securities issued also increased by 53.36% in the reporting period.
Risk Assets Quality
The average risk weight of on balance sheet and off balance sheet items stood at 62.63% at the end of reporting period, a decrease of 1.40% from previous year. The average risk weight of on balance sheet items was 66.85% whereas the average risk weight of off balance sheet items is 36.55%. At the end of reporting period, the average risk weight of on balance sheet items decreased by 1.47% whereas the average risk weight of off balance sheet items increased by 1.33%. The non-performing loans of the Bank stood at NPR 3.83 billion which is an increment of 91.91% in comparison to previous year. Similarly, the NPA% has also increased to 2.01% which was 1.07% in previous year.
Capital Adequacy Ratio
The capital adequacy ratio (CAR) is a measure of how much capital the bank has available, reported as a percentage of the bank’s risk-weighted exposures. The purpose is to establish that the Bank has enough capital on reserve to handle a certain amount of losses, before being at risk for becoming insolvent. The capital adequacy ratio of the Bank at the end of reporting period was 12.47%, which is 1.47% higher than the statutory requirement of 11%. Similarly, Tier I capital of the Bank stands at 9.37% which is 0.87% higher than the statutory requirement of 8.50%. The risk weighted exposures of the Bank has increased by 7.41% in current fiscal year which was majorly caused by increase in risk weighted exposure for credit risk. The total capital of the Bank has increased by 3.08% with major increment in Tier I capital. In the reporting period, the Tier-I capital of the Bank has increased by 11.37% whereas Tier-II capital of the Bank has decreased by 15.86%.
Non Financial Performance of the Bank
- The Bank has been continuously revisiting its organizational structure based on the business need and emerging dynamism in the banking sector over the next 5 years. The purpose of structural development in the Bank is to improve the Bank’s ability to enhance business, manage risk, reduce costs and generate profits.Major changes in organization structure are: creation of verticals for business such as Corporate, MSME, Retail and HNI/Liability Management; realignment of credit flow processes by creation of Credit Underwriting Department; creation of Transaction Banking and International Business for special focus on transaction based fees income and exploring foreign tie ups.
- The Bank has recently set up ESG department and shall work upon emerging the Bank as a sustainable Bank of the country, in line with new vision and mission. This will help to strengthen ESRM activities for sustainable business growth as a first step toward recognition of “Green Bank”, thereby enhancing its long-term viability, recognition and contributing positively to society and the environment.
- Credit Risk, Credit Administration and internal audit officials has been deputed in all provinces/ sub provinces.
- Learning & Development portal has been developed and learning materials are digitally maintained making it accessible to staffs to enhance their knowledge and skills.
- Launched training calendar and successfully conducted 246 trainings to 3,786 participants. 34 staffs were provided 17 trainings internationally. In-house and domestic trainings were provided to remaining staffs. This helped in improving performance, enhancing job satisfaction and increasing engagement of the employees.
- 247 new staffs were hired and 173 staffs resigned from the Bank in FY 2022-23. No. of human resources were contained to 1,970 which was 1,896 in previous year, just an increment of 3.90%.
- The Bank has robust risk management framework which encompasses regular risk assessments, formulation of comprehensive policies and Standard Operating Procedures (SOPs) and refinement of operational procedures to align with evolving business dynamics. In FY 2022-23, the Bank formulated 3 new policies, 3 new SOPs, 5 new product papers and 1 manuals/ guidelines. Besides that, the Bank has continually revised and updated its policies and SOPs. The Bank reviewed 7 policies and 12 SOPs in FY 2022-23.
-
In order to enhance credit risk management
- Conducted a survey of watchlist and NPA classified borrowers to assess the recession’s impact.
- Mapped credit ratings of external agencies with internal credit ratings.
- Reviewed codes pertaining to the Agriculture Sector and Climate Financing.
- Implemented a three-layer sector coding system.
- Created a platform for monitoring adverse media coverage of borrowers, guarantors, or any individuals/entities affecting the bank’s financial performance.
- Launched cash deposit machine from three branches – Hattisar, Biratnagar and Pokhara.
- Introduced of the Visa Platinum debit card to elevate customer banking experiences.
- Implemented Web Application Firewall (WAF) to fortify security for 13 externally accessible applications and the Bank’s website.
- Established of a Data Center Infrastructure at the Head Office.
- Deployed of Loan Management Solution (LMS) to facilitate efficient credit approvals and enhance credit risk management.
- Adoption of Customer Relationship Management Software (CRM) to enrich sales and marketing functions by providing a comprehensive Customer 360 View.
- Successful migration of the Core Banking System (CBS) to Finacle, marking a milestone achievement without hiccups.
- Acknowledging the importance of remittances, the Bank expanded its presence in foreign countries by partnering with new remittance providers such as Al Jazira Exchange and Al Rouzuki Exchange in the UAE, enhancing its remittance facilities and supporting economic growth.
Branding
With 513,492 page views, 153,976 users and 136,043 new users, the Bank’s website experienced significant interest and interaction.
Social media platforms have become integral for communication, marketing, brand building and networking. Recognizing the importance of reaching the younger generation (Gen Z), the Bank launched various campaigns on social platforms, resulting in substantial growth in followers across platforms such as Facebook, Instagram, Twitter, LinkedIn, TikTok, YouTube, and Viber. This increased presence on social media has contributed to the Bank’s efforts to attract new customers, elevating its ranking among commercial banks on Facebook.
In FY 2022-23, a range of digital marketing initiatives were undertaken to promote and enhance the online presence of the Bank:
- Search Engine Optimization Campaign: In FY 2022-23, Search Engine Optimization (SEO) campaigns were initiated to improve the Bank’s visibility on search engine results pages of Google.
- Social Media Traffic Campaign: The Social Media Traffic Campaign implemented during the FY 2022-23 aimed to drive visitors to the Bank’s website by utilizing different social media platforms, resulting in increased user engagement and page views of the Bank’s website.
Cash deposit and cheque Deposit Machine deployed from Fiscal Year 2022-23
Digital Service through Contact Center
Service request resolved digitally through
Contact Center (FY
2022-23)
Way Forward
Throughout the FY 2022-23, the Bank steered through market fluctuations, showcasing resilience and maintaining competitiveness within the financial realm. Looking ahead to the challenging landscape of FY 2023-24 and beyond, the way appears even tougher. Nevertheless, the Bank remains steadfast in its determination to pursue its predefined objectives with thorough attention and vigilant monitoring.
- Recently, the Bank finalized its five-year strategic plan, aligning its vision and mission with future objectives. The Bank is committed to implementing these plans within the specified timeframe.
- The need for tapping MSME businesses and retail loans is imminent for better management of loan portfolio, risk diversification and increment of yield. Large numbers of relatively small ticket size loans significantly lessen the impact of a default by any counterparty. Accordingly, the Bank has been focusing on MSME and retail loans and will continue to enhance MSME mix.
- The Bank has implemented capital based pricing model and is planning to implement risk based pricing model linking with sector based/ geographic based pricing strategy.
- Continuous monitoring of dormant/ zero balance accounts will be enhanced further so that sales staffs can communicate with the customers for reactivation and continued transactions in such accounts. Proper database shall be maintained to ascertain the reasons for decrease in use of the accounts and turning into dormant accounts so that the data can be used for restructuring existing products and planning new products.
- The Bank shall complete its ongoing digitization projects on time and utilize optimal for service excellency and efficiency in operations.
- ENS division will be further strengthened, with the recent signing of a memorandum of understanding (MOU) with Invest for Impact Nepal as an integral step in this process.
- The Bank has initiated for membership of Partner for Carbon Accounting Financials (PCAF). Membership of PCAF can help financial institutions integrate climate considerations into their operations and investment strategies, leading to more resilient and sustainable financial practices.
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