Every year the same thing happens on NEPSE. A commercial bank announces a record net profit, the headline numbers look fat, and retail investors do the obvious arithmetic in their heads. Big profit, big dividend, surely. Then the dividend proposal arrives, and it is far smaller than the profit implied. The forums fill up with the same complaint: the bank made crores; where did my money go?
The short answer is that net profit and the money a bank can actually pay you are two different numbers, and the gap between them has a name. It is called distributable profit. If you want to understand a bank’s dividend, this is the single most important distinction to learn, and most investors never do. This article explains the mechanism behind distributable profit vs. net profit, walks through each reserve that eats into the payout, and shows you where to find the real number in the financial statements. The take is blunt: net profit is a vanity figure for dividend purposes. Distributable profit is the one that pays you, and a wide gap between the two is a quiet warning about the bank’s asset quality.
Net profit is the accounting bottom line, not the cash box
Net profit is what is left after a bank books its interest income, fee income, and trading gains, then subtracts interest expense, staff costs, operating costs, loan-loss provisions, and tax. It is the bottom line of the income statement. It tells you whether the bank made money over the period. That is genuinely useful information.
What net profit does not tell you is how much of that money the bank is legally allowed to hand to shareholders. In Nepal, a bank cannot simply pay out its full net profit. The Nepal Rastra Bank (NRB) and the governing law force the bank to set aside chunks of that profit into reserves before anything reaches the dividend pool. Some of those reserves are about long-term safety. Others exist specifically because a portion of the reported profit is not real cash yet. Only what survives all of those transfers is distributable.
Think of net profit as the total bill of earnings and distributable profit as your share after the regulator takes its mandatory cuts. The cuts are not optional, and they are not small.
The reserves that shrink the payout
NRB-mandated and law-mandated reserves are the reason the dividend disappoints. Here are the major ones, in plain terms.
General reserve (the statutory reserve)
This is the oldest and most predictable cut. Under the Banks and Financial Institutions Act (BAFIA) 2073, a bank must transfer a fixed slice of its annual net profit into a general reserve, also called the statutory reserve, every single year. The transfer rate is of net profit until the reserve reaches twice the bank’s capital, after which the rate steps down.
No dividend, cash, or bonus can ever be paid out of the general reserve. It is permanent retained capital. So before a rupee of profit is even considered for distribution, a fixed fraction is gone. For a young or fast-growing bank still building this reserve, the higher rate applies, and the bite is larger.
Regulatory reserve (the one that matters most for asset quality)
This is the reserve that catches investors off guard, and it is the heart of the story. When Nepali banks moved to Nepal Financial Reporting Standards (NFRS), the accounting started recognizing some income and asset values that NRB considers too soft to pay dividends against. To stop banks distributing profit they have not really earned in cash, NRB created the regulatory reserve.
The most important item parked here is accrued-but-uncollected interest. Under accrual accounting, a bank records interest income when it is due, not when the cash actually arrives. So if a borrower owes interest and has not paid it, the bank still books that interest as income, and it flows into net profit. But it is income on paper only. The cash is not in the building.
NRB’s rule is straightforward. Interest that has been booked as income but not collected has to be set aside into the regulatory reserve, net of the related tax and staff bonus, so it cannot be paid out as a dividend. The bank reports the profit, but it has to fence off the portion that is still just a receivable.
Other items also sit in the regulatory reserve: deferred tax assets, gains from carrying non-banking assets (property seized against bad loans), and certain fair-value gains on investments. The common thread is that all of them are accounting gains that have not turned into spendable cash.
Here is why this reserve is a warning light. The regulatory reserve grows when a bank is booking a lot of interest it has not collected. That happens when borrowers stop paying. So a swelling regulatory reserve is, in effect, a signal that loan quality is deteriorating, even before it fully shows up in the headline non-performing loan ratio. A bank can report a glowing net profit while quietly moving a large slice of it into the regulatory reserve because much of that profit is uncollected interest from shaky borrowers. The dividend shrinks, and the reason is asset quality. For how the NPL ratio and other bank health metrics fit together, see our guide to banking ratios: NPL, CD, and CAR explained.
Exchange equalisation fund
Banks that hold foreign currency assets book gains when the rupee weakens against those currencies. But that gain is a revaluation on paper, not realized cash from a completed transaction. NRB requires a portion of such foreign exchange revaluation gains to be transferred to an exchange equalization fund. This protects the bank if the rupee swings back the other way. For most commercial banks this is a smaller line than the regulatory reserve, but it is another claim on the profit before it becomes distributable.
Other appropriations
Depending on the bank and the year, profit may also be routed into items like a corporate social responsibility fund, an employee training fund, a debenture redemption reserve, and a capital adjustment or fair-value reserve. Individually, most are small. Together they add up, and they all sit ahead of you in the queue.
So what actually counts as distributable
Distributable profit is what remains after all of those mandatory transfers are made and after any negative balances are cleaned up. In practice it starts from accumulated profit (this year’s net profit plus retained earnings carried forward) and then subtracts the general reserve transfer, the regulatory reserve transfer, the exchange equalization transfer, and the other appropriations. The figure left over is the legal ceiling on what the board can propose as a dividend.
There is one more guardrail worth knowing. NRB has set a floor below which cash dividends are blocked entirely: a bank whose net distributable profit is below of its paid-up capital is not permitted to pay a cash dividend at all. The intent is to stop weak banks from draining capital to keep shareholders happy. The effect, for investors, is that a thin distributable profit can mean no cash dividend even when the bank reported a profit.
A worked example
Assume a commercial bank reports the following for the year. These are illustrative figures, not a real bank, chosen to show the mechanism.
- Net profit for the year: NPR 2 crore (NPR 2,00,00,000)
- Retained earnings brought forward: nil, to keep it clean
- Paid-up capital: NPR 12 crore
Now the mandatory transfers. Using the statutory rate for the general reserve, the bank moves NPR 40 lakh (20% of net profit) into the general reserve. Gone.
Suppose a large share of this year’s reported interest income was booked on loans where the borrower has not actually paid. The bank has to fence that off. Say the regulatory reserve transfer for accrued-but-uncollected interest and related items comes to NPR 90 lakh, net of tax and bonus. Gone.
Add a modest exchange equalization transfer of NPR 5 lakh and other appropriations (CSR fund, training fund) of another NPR 5 lakh.
Run the arithmetic:
- Net profit: NPR 2,00,00,000
- Less general reserve: NPR 40,00,000
- Less regulatory reserve: NPR 90,00,000
- Less exchange equalisation: NPR 5,00,000
- Less other appropriations: NPR 5,00,000
- Distributable profit: NPR 60,00,000
The bank posted NPR 2 crore in profit. The amount it can legally distribute is NPR 60 lakh, less than a third of the headline. And notice what did most of the damage. The general reserve took a fixed, predictable 20%. The regulatory reserve took the biggest single bite, NPR 90 lakh, and it took it precisely because a large part of the reported profit was interest the bank has not collected. That is the asset-quality warning, sitting right there in the appropriation.
Now imagine a second bank with the same NPR 2 crore net profit but clean collections, so its regulatory reserve transfer is only NPR 10 lakh. Its distributable profit would be around NPR 1.4 crore, more than double the first bank, off the identical headline profit. Two banks, same net profit, very different dividend capacity. The difference is buried in the reserves.
Where to find the real number
You do not have to take the dividend announcement on faith. The figures are in the published financials, and learning to read them changes how you value a bank. Our walkthrough on how to read a bank’s quarterly report covers the full statement, but for distributable profit, focus on these.
In the annual financial statements, look for the Statement of Distributable Profit or Loss, sometimes presented as a distributable profit reconciliation. NRB’s prescribed format requires banks to show this reconciliation explicitly. It starts from net profit or accumulated profit and walks down through each appropriation to the distributable figure at the bottom. Read it from the bottom up: the last line is what can actually be paid.
Next, find the Statement of Changes in Equity and the notes on reserves. Watch the year-on-year movement in the regulatory reserve. A regulatory reserve that jumps sharply, especially faster than the loan book is growing, tells you the bank is booking interest it is not collecting. That is the single most useful number for spotting a dividend that is about to disappoint, and it often moves before the NPL ratio fully catches up.
Finally, compare distributable profit to paid-up capital. That ratio, not net profit, is what governs whether and how much cash can come your way and whether the NRB floor on cash dividends is even cleared.
The verdict
For dividend purposes, net profit is close to meaningless on its own. It is the gross figure before the regulator takes its mandatory cuts, and treating it as your likely payout is how investors set themselves up for disappointment every results season. Distributable profit is the number that pays you. Learn to find it and judge a bank’s dividend against it, not against the headline.
More than that, treat the gap between the two as information. A modest gap, mostly the predictable general reserve, is normal and healthy. A wide gap driven by a ballooning regulatory reserve is a quiet red flag: it means a large slice of the reported profit is interest the bank has booked but not collected, which points straight at deteriorating loan quality. The dividend shrinks for the same reason the asset book is weakening. Two symptoms, one disease.
This matters for the broader question of whether Nepal’s commercial banks are still worth holding for income, which we take up in our piece on the commercial bank dividend thesis. And once a dividend is declared, remember the tax that follows it, covered in dividend tax on NEPSE stocks.
The next time a bank trumpets a record net profit, do not reach for the calculator. Reach for the distributable profit statement. That is where the truth about your dividend and the bank’s health is written.
This is analysis, not financial advice.
