Nepal’s banking sector is facing mounting asset quality concerns as the ratio of non-performing loans (NPLs) among commercial banks has risen to 5.41 percent, increasing risks to the country’s financial system and limiting banks’ ability to extend new credit.
The figures, disclosed in the Nepal Rastra Bank’s (NRB) Monetary Policy for Fiscal Year 2026/27, also show a sharp rise in loans classified under the watchlist category, which increased from 6.7 percent to 11.1 percent. The central bank says this trend indicates that a larger volume of loans could deteriorate into non-performing assets in the coming months if economic conditions do not improve.
The growing stock of problem loans is expected to place additional pressure on banks’ balance sheets, requiring higher loan-loss provisions and further constraining their lending capacity at a time when credit demand remains weak.
According to the NRB, one of the most significant vulnerabilities in Nepal’s financial system is the heavy concentration of lending against real estate collateral.
The central bank’s review shows that around 60 percent of total bank lending is secured by land and residential property, while 84 to 86 percent of the loan portfolios of development banks and finance companies are backed by real estate assets.
However, with Nepal’s property market remaining sluggish, banks are finding it increasingly difficult to recover defaulted loans by auctioning pledged collateral. Weak demand in the real estate sector has reduced the effectiveness of collateral recovery, prolonging the resolution of bad loans and increasing financial risks.
The NRB warned that the continued deterioration in asset quality could weaken the banking sector’s capacity to support economic recovery unless measures are taken to improve loan recovery, stimulate productive investment, and strengthen financial sector resilience.
The latest data underscores the growing challenges facing Nepal’s banking industry, where rising non-performing loans, weak credit expansion, and a prolonged slowdown in the real estate market continue to weigh on overall financial stability.
