Kathmandu — As Nepal’s commercial banks released their unaudited financial statements for the second quarter of fiscal year 2025/26 (mid-January), a mixed picture has emerged. While core income indicators show marginal improvement, deeper analysis suggests that the sector’s financial health remains fragile, weighed down by rising bad loans and an increasing dependence on accrued but unrealized interest income.

According to second-quarter disclosures, Nepal’s 20 operating commercial banks collectively earned approximately NPR 96.05 billion in net interest income by mid-January. This represents a 3.72 percent increase compared to the same period last fiscal year, indicating a mild recovery in banks’ primary source of earnings. In the previous year, total net interest income stood at around NPR 92.6 billion. Out of the 20 banks, 14 reported growth in net interest income, while six experienced a decline, reflecting uneven performance across the sector.

In absolute terms, Nabil Bank maintained its leading position, posting net interest income of over NPR 8.08 billion, a modest year-on-year increase. Global IME Bank, ranked second, generated more than NPR 8.02 billion in net interest income, although this figure marked a decline compared to the previous year. Kumari Bank, meanwhile, stood out for its strong performance, recording a sharp growth rate of over 27 percent and signaling improved balance-sheet efficiency.

From a growth-rate perspective, the most significant improvement was observed in the government-owned Rastriya Banijya Bank, which expanded its net interest income by nearly 38.5 percent compared to last year. Several other banks—including Sanima, Agricultural Development Bank, NMB Bank, and Nepal SBI Bank—also reported above-average growth, suggesting selective recovery within the system rather than a broad-based rebound.

However, not all institutions shared in the improvement. NIC Asia Bank recorded the sharpest decline, with net interest income falling by nearly 16 percent. Nepal Investment Mega Bank and Himalayan Bank also posted double-digit contractions, while Nepal Bank, Standard Chartered Bank Nepal, and Global IME Bank saw moderate declines. These figures highlight the pressure faced by banks with higher exposure to stressed sectors and weaker loan recovery.

While net interest income has shown tentative improvement, profitability trends reveal deeper structural concerns. During the second quarter, commercial banks collectively earned NPR 30.59 billion in net profit—an increase of around 11.5 percent year-on-year. On the surface, this suggests strengthening profitability. However, nearly NPR 8.52 billion—about 28 percent of total profits—came from interest income that has accrued but not yet been collected.

Under Nepal Financial Reporting Standards, banks are permitted to recognize accrued interest as income, even if it has not been received in cash. Although regulatory adjustments later require partial reversals, the growing reliance on such income raises concerns about earnings quality. Compared to the same period last year, when unrealized interest formed a much smaller portion of profits, the current trend indicates mounting stress in loan recovery.

Bank-specific data further underscores this issue. By mid-January, NIC Asia Bank had the highest volume of unrealized interest, exceeding NPR 1.45 billion, while Nepal Investment Mega Bank’s unpaid interest income also crossed the NPR 1 billion mark. Notably, all commercial banks reported some level of unrealized interest this quarter, whereas in the previous fiscal year several institutions had fully recovered such amounts.

The deterioration in asset quality is reflected in rising non-performing loans (NPLs). As of mid-January, the average NPL ratio of Nepal’s commercial banks climbed to 5.08 percent. Banking experts attribute this trend to prolonged economic slowdown following the COVID-19 pandemic, compounded by recent social and political disruptions that weakened borrowers’ repayment capacity.

To contain bad loans, banks have increasingly moved toward collateral enforcement, leading to a rise in non-banking assets on their balance sheets. However, sluggish activity in the real estate market has made asset liquidation difficult, adding another layer of complexity to banks’ risk management efforts.

Overall, while the modest rise in net interest income suggests that Nepal’s banking sector may be edging toward short-term stability, underlying vulnerabilities remain pronounced. The growing dependence on unrealized interest, bad loans exceeding the five-percent threshold, and an expanding stock of non-banking assets signal persistent structural challenges. Without stronger loan recovery, improved credit discipline, and a broader economic revival, the apparent recovery in headline figures may prove difficult to sustain.