Manipulated financial statements spark concerns over banking practices in Nepal

KATHMANDU: Nepal Rastra Bank (NRB) has identified errors in the financial statements disclosed by commercial banks through newspapers last July. The central bank approved the financial statements by increasing provisions as per legal requirements after discovering that banks had not made provisions in accordance with the standards set by NRB.

According to NRB, while approving the financial statements of 16 banks so far, the profits of most banks have decreased. “The financial statements published in July showed unusually high profits due to inadequate provisioning by the banks,” said an NRB official. “After enforcing legal provisions, significant changes were observed in the financial statements of most banks, except for three state-owned banks and three banks with foreign partnerships.”

The NRB official further noted that there were no significant issues in the financial statements of Rastriya Banijya Bank and Agriculture Development Bank. Similarly, the financial statement of Nepal Bank is under approval, but no major issues have been identified. Additionally, there were no substantial changes in the financial statements of Standard Chartered Bank, Nepal SBI Bank, and Everest Bank. However, the financial statements of 14 other commercial banks underwent significant modifications.

The financial statements published by commercial banks in July mentioned a net profit of NPR 64.15 billion. However, sources indicate that the net profit of commercial banks fell below NPR 45 billion in the financial statements approved by NRB.

The July report claimed that NPR 7.62 billion from last year’s profit was distributable. However, after adjusting for provisions that were either concealed or omitted during the preparation of the financial statements, both the net profit and distributable profit of commercial banks decreased.

NRB officials confirmed that the financial statements of Nepal Investment Mega Bank, NIC Asia Bank, Kumari Bank, and Nepal Bank are yet to be approved.

The banks had inflated profits by showing loans categorized as inactive as active, thereby reducing provisions. However, NRB categorized loans with unpaid principal and interest as inactive and required provisions to be made accordingly, leading to a decline in bank profits.

“Banks deliberately manipulated financial statements to momentarily please shareholders and influence the stock market,” said an NRB official. “Had we scrutinized the financial statements more thoroughly, the profits would have decreased even further.”

Some banks even attempted to manipulate their financial statements, hoping to influence NRB, according to officials.

In the first quarter of the current fiscal year, the average non-performing loans (NPL) of commercial banks increased by 14.44%. As of the end of Ashoj (mid-October), the average NPL of commercial banks reached 4.28%, compared to 2.90% in the same period last year.

NRB officials predict that with increased provisions in the approved financial statements, the overall NPL of commercial banks will exceed 5% when the data for the end of Poush (mid-January) is published.

“With international auditors reviewing the top 10 banks, practices like issuing new loans to repay old ones will no longer go unnoticed,” said an NRB official. “The problem arose because banks previously lent based on collateral rather than business potential. Now, with stagnant real estate transactions, the repayment of principal and interest has weakened even further.”