Banks and Financial Institutions (BFIs) have received temporary relief from the requirement to sell collateral fixed assets of loan defaulters, following a Supreme Court (SC) ruling that eases the process of disposing of non-banking assets.
Previously, BFIs were required to auction fixed properties used as loan collateral within three years after loans turned non-performing. If unable to do so within the set period, they had to seek government approval to recover their dues. This provision was enforced through an amendment to investment facilitation legislation, published in the Nepal Gazette on July 8, 2024.
However, the apex court has now issued an interim order halting implementation of the new rule. The decision came from a five-member bench led by Chief Justice Prakash Man Singh Raut while hearing a writ petition filed by the Confederation of Banks and Financial Institutions Nepal (CBFIN). The provision will remain suspended until the court delivers its final verdict.
Non-banking assets refer to collateral properties acquired by banks when borrowers default. These properties are auctioned to recover funds, and the recovered amount helps offset loan loss provisioning. A rise in non-banking assets is considered a sign of increased risk in the banking sector.
According to CBFIN, the SC’s interim order provides short-term relief as BFIs are currently experiencing rising non-banking asset accumulation due to increasing loan defaults. Nepal Rastra Bank data shows that non-banking assets reached Rs 50.55 billion last fiscal year, with commercial banks accounting for Rs 42.11 billion.
In the past year alone, non-banking assets of commercial banks increased by 37 percent (Rs 11.52 billion). Several commercial banks now have non-performing loan (NPL) ratios exceeding seven percent. Of the 53,571 borrowers blacklisted during the review period, 18,801 were defaulters, according to the Credit Information Bureau (CIB).
Bankers attribute the rise in defaults to economic slowdowns in sectors such as real estate, SMEs, and construction. They also claim recent youth-led Gen Z protests and disturbances have further weakened borrowers’ capacity to repay on schedule.
