KATHMANDU, May 19: A recent loan portfolio review commissioned by Nepal Rastra Bank (NRB) has revealed widespread malpractices in the country’s major commercial banks, raising concerns over loan recovery processes, asset quality, and regulatory compliance. The review found that while banks continue to report capital adequacy ratios above regulatory thresholds, many have engaged in practices such as evergreening loans, overvaluing collateral, and under-provisioning for bad debt to inflate their financial performance.
The average non-performing loans (NPLs) of the 10 large commercial banks included in the review stood at 7.6 percent, with their capital adequacy ratio recorded at 11.30 percent. Despite these figures, the NRB report highlighted that several banks are struggling with loan recovery and have resorted to questionable methods to mask the true extent of their financial stress.
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The external review was commissioned after the International Monetary Fund (IMF) made it a condition for releasing the fourth tranche of funding to Nepal under the Extended Credit Facility (ECF). In February 2023, the IMF had cautioned that asset quality in Nepal’s banking sector was deteriorating due to weaker borrower repayment capacity, rising lending rates, and increasing leverage, even though capital adequacy ratios remained above minimum requirements.
To carry out the review, NRB hired Bangladeshi consulting firm Howladar Yunus & Co, which examined the loan portfolios of Global IME Bank, Nabil Bank, Nepal Investment Mega Bank, Rastriya Banijya Bank, Kumari Bank, Laxmi Sunrise Bank, Prabhu Bank, Himalayan Bank, NMB Bank, and NIC Asia Bank. According to NRB officials, capital pressure has already been observed in some institutions, with Himalayan Bank, NIC Asia Bank, Prabhu Bank, Kumari Bank, and National Commercial Bank potentially requiring additional capital to meet regulatory compliance.
Under NRB’s current rules, loans overdue by up to one month are classified as good loans with 1 percent provisioning, while those overdue by 1–3 months are placed on a watchlist requiring 5 percent provisioning. Loans overdue by 3–6 months are deemed sub-standard with 25 percent provisioning, those overdue by 6–12 months are classified as doubtful with 50 percent provisioning, and loans overdue by more than a year are treated as bad debt requiring 100 percent provisioning. However, the review found that many banks failed to properly classify loans and did not adhere to these provisioning requirements.
The NRB report further noted that banks often issued new loans despite weak project progress, engaged in re-loaning practices to cover existing debt, and failed to conduct effective project monitoring. In response, the central bank has sought clarifications from the concerned banks and stated that corrective measures—including additional provisioning, capital base increments, or other regulatory instructions—will be implemented after evaluating the banks’ responses.
While the NRB concluded that there is no immediate crisis in the banking system, the review underscored critical areas for improvement, including risk management, credit classification, restructuring, and regulatory compliance. The findings highlight the need for stronger oversight and reforms to ensure the stability of Nepal’s financial sector.
