Nepal Rastra Bank (NRB) has resumed efforts to audit the loan portfolios of 10 major commercial banks, a process that had previously stalled.
In a public notice, NRB invited Expressions of Interest (EOI) for an extensive Asset Quality Review (Loan Portfolio Review) of these banks. Consulting firms have been given a deadline of January 6, 2025, to apply.
For years, the International Monetary Fund (IMF) has urged NRB to engage international auditing firms to examine the loan portfolios of Nepal’s largest commercial banks. This recommendation stems from concerns over the quality of loans these banks have issued.
The IMF has linked this audit to the disbursement of the fourth installment under Nepal’s Extended Credit Facility (ECF). Approved in January 2022, the ECF provides Nepal with USD 398.8 million over four years. While three installments have been disbursed, the fourth installment—worth approximately Rs 5.59 billion (USD 42 million)—remains pending.
According to NRB officials, the international audit is a requirement under the Article IV mission of the ECF. Concerns have been raised over potential lapses in regulatory compliance, with some banks allegedly granting loans under lenient conditions.
In a February 2023 statement, the IMF highlighted a decline in the repayment capacity of borrowers, driven by rising lending rates and leverage, which has led to worsening asset quality. Despite banks maintaining capital adequacy ratios above regulatory thresholds, their non-performing loans (NPLs) have surged.
As of mid-July 2024, the NPL ratio for banks reached 3.8%, triggering a 29.5% rise in loan-loss provisions. By mid-October, the NPL ratio had climbed further to 4.42%, with several banks exceeding 5%. This increase in bad debt has also led to an accumulation of non-banking assets that banks are struggling to offload.
The IMF’s insistence on this review aims to ensure the financial stability of Nepal’s key financial institutions, NRB sources explained. The review will assess whether loans were issued responsibly and whether collateral quality is sufficient to ensure repayment.
Previously, NRB had shortlisted five international auditing firms and selected KPMG Assurance and Consulting Services, India, for the audit. However, the process was annulled when KPMG failed to secure approval for its financial proposal.
