Nepal’s banks and financial institutions (BFIs) could face stricter provisioning requirements after a recent review of loan portfolios revealed weaknesses in credit risk management and reporting, particularly among Class A commercial banks.
Officials at Nepal Rastra Bank (NRB) said the review of 10 major commercial banks, conducted by Bangladeshi consulting firm Howladar Yunus & Co, found that banks had failed to maintain adequate provisioning against loans vulnerable to default. The review also identified shortcomings in loan classification practices, especially those linked to recovery prospects.
“The report shows that banks have not properly implemented rules related to loan classification and provisioning, which has increased credit risk,” an NRB official said, speaking on condition of anonymity.
The central bank commissioned the external assessment following a condition set by the International Monetary Fund (IMF) for releasing the fourth tranche of funding to Nepal under the Extended Credit Facility (ECF). In a statement issued in February 2023, the IMF warned that asset quality in Nepal’s banking sector had weakened due to declining borrower repayment capacity, higher interest rates, and rising leverage, even though capital-adequacy ratios remained above regulatory requirements.
The consultant examined 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. Two banks recorded NPL ratios exceeding 10 percent—figures higher than those officially reported to the NRB.
The review also highlighted weaknesses in project documentation and monitoring. Several banks were found to have inadequate records of site visits and project progress. In some cases, banks were involved in evergreening practices, issuing additional loans to stalled projects with minimal or no progress.
Based on the findings, the consultant has recommended that the NRB strengthen supervision of loan classification and overdue categorisation.
Under existing NRB regulations, loans overdue by up to one month are classified as good loans and require 1 percent provisioning. Loans overdue for 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 for 6–12 months are deemed doubtful and require 50 percent provisioning. Loans overdue by more than one year are classified as bad debt and require 100 percent provisioning.
