KATHMANDU, Feb 10: Nepali banks and financial institutions (BFIs) may face stricter provisioning requirements after a recent loan portfolio review found weaknesses in credit risk management and reporting among Class A banks.
Officials at Nepal Rastra Bank (NRB) said a review of 10 large commercial banks, conducted by Bangladeshi consulting firm Howladar Yunus & Co, revealed that banks had failed to maintain adequate provisioning against loans at risk of default. The review also found lapses in loan classification linked to recovery prospects.
“The report indicates that banks have not properly adopted rules related to loan classification and provisioning, increasing credit risk,” an NRB official said on condition of anonymity.
Lending slows as banks focus on recovery of loans at fiscal yea...
The central bank commissioned the external review after the International Monetary Fund (IMF) made it a condition for approving the fourth tranche of funding to Nepal under the Extended Credit Facility (ECF). In a statement issued in February 2023, the IMF had warned that asset quality in Nepal’s banking sector had deteriorated due to weaker borrower repayment capacity, higher lending rates and rising leverage, despite capital-adequacy ratios remaining above regulatory thresholds.
The consultant reviewed 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 the report, the average non-performing loan (NPL) ratio of Nepali banks stood at 7.70 percent, with two banks recording NPLs above 10 percent—higher than the figures reported by the banks to the NRB.
The review also found weaknesses in project documentation and monitoring. Several banks had failed to maintain proper records of site visits and project progress, while some were found to be involved in evergreening—issuing additional loans to stalled projects with little or no progress.
The consultant has recommended that the NRB tighten supervision of loan classification and overdue categorisation.
Under current NRB rules, loans overdue by up to one month are classified as good loans and require 1 percent provisioning. Loans overdue by 1–3 months are placed on a watchlist with 5 percent provisioning. Overdues of 3–6 months are classified as sub-standard with 25 percent provisioning, while loans overdue by 6–12 months are deemed doubtful and require 50 percent provisioning. Loans overdue by more than a year are treated as bad debt, requiring 100 percent provisioning.
