Bad debts of banks and financial institutions (BFIs) have continued to increase over the past year as lenders struggle to recover outstanding loans.
According to Nepal Rastra Bank (NRB), the average non-performing loan (NPL) ratio of commercial banks reached 5.03 percent as of mid-November, rising by 0.75 percentage points compared to the same period last year. In mid-November of the previous fiscal year, the 20 commercial banks had an average NPL ratio of 4.28 percent.
Similarly, the bad debt ratio of development banks increased by 1.66 percentage points to 6.03 percent during the review period. As of mid-November of the current fiscal year 2024/25, B-class financial institutions recorded non-recovered loans at 4.37 percent. Finance companies also saw a rise in bad debts, which increased to 12.52 percent from 10.84 percent a year earlier.
Bankers say loan recovery has become increasingly difficult, mainly due to the impacts of the Gen Z movement. “It was already challenging because of the prolonged economic slowdown, and the recent political unrest has further worsened the situation,” said a banker on condition of anonymity.
Based on the overdue period of loans, the NRB classifies non-performing loans into three categories: substandard, doubtful, and bad loans. Bad loans are those overdue for more than one year. For such loans, BFIs are required to maintain 100 percent provisioning of the loan amount.
Citing concerns over the weakening financial health of BFIs, the NRB has recently revised provisions related to the classification of bad debts. Under the revised rule, BFIs are no longer required to automatically classify outstanding dues as bad loans if borrowers resume installment payments even after the auction process of collateral has begun. Previously, loans were automatically considered bad once collateral auctions started or legal cases were filed against defaulters.
The surge in bad debts has also led to a significant increase in the non-banking assets of BFIs. NRB records show that such assets rose by 33.49 percent to Rs 51.07 billion over the past year.
Non-banking assets refer to fixed properties held as collateral by borrowers, which banks auction when loans turn into bad debts. Banks can use the proceeds from these auctions to write off provisions set aside for bad loans.
As of mid-November, the non-banking assets of commercial banks stood at Rs 43.19 billion, while development banks and finance companies held such assets worth Rs 4.84 billion and Rs 3.04 billion, respectively.
