Monetary policy must address the structural challenges in Nepal’s banking sector

KATHMANDU: Nepal Bankers’ Association believes that the upcoming monetary policy should address the prevailing structural challenges in the banking sector. While the fiscal policy has already made certain announcements, there is now widespread expectation that the monetary policy will provide the necessary tools to implement and support those directives.

One of the most pressing issues is the formation of an Asset Management Company (AMC). Banks have raised questions about its necessity, arguing that they are already managing assets to some extent. However, without a strong AMC, non-performing loans (NPLs) and non-banking assets (NBAs) are bound to increase. Over time, banks have encountered challenges that they alone cannot resolve. This is why we, as bankers, have long called for a robust, independent, and powerful AMC, similar to international models.

Such a company must be capable of handling distressed assets without relying on other government bodies. Banks currently face complications when trying to liquidate NBAs due to policy contradictions between local and provincial governments regarding taxes and asset transfers. In some cases, even ward officials refuse to provide basic access, citing concerns about their voters or neighbors.

This fragmented policy environment is hindering the ability of banks to resolve defaulted assets. Further complications arise from tax ambiguities—banks are often required to pay full taxes on all assets, even when only part of the collateral is being liquidated. This calls for a legally empowered AMC with authority to facilitate such transactions without bureaucratic delays.

There has been growing public and political scrutiny of banks, often based on the perception that they are excessively profit-driven. However, the average Return on Equity (ROE) in the banking sector has fallen to around 6%, disproving the narrative that banks are thriving while others struggle.

Moreover, sectors prioritized by national directives—agriculture, SMEs, and energy—have shown rising NPL levels. For instance, agriculture has over 9% NPL, and SME loans exceed 8.5%. While banks are mandated to increase lending in these sectors, it’s equally important to assess the risk exposure and ensure that monetary tools address these realities.

Borrowers, even when their businesses have failed, are selling their assets out of fear that their names will be published in newspapers as defaulters. Unfortunately, despite their efforts, asset sales are not materializing due to low demand and legal complications.

In terms of working capital guidelines, while they’ve helped instill discipline among bankers and borrowers, some elements require thoughtful revision. The demand to scrap the guidelines entirely is misguided. Instead, the focus should be on constructive amendments based on field-level feedback.

Capital pressure remains another concern. The average core capital ratio of banks now stands at around 9%, just above the 8.5% minimum required for dividend distribution. Some banks have tried to issue debentures to strengthen capital, but delays in regulatory coordination—particularly between the Nepal Rastra Bank (NRB) and the Securities Board of Nepal (SEBON)—have hindered progress. Approval bottlenecks at SEBON have left other banks in a wait-and-see mode.

Credit expansion, which was targeted at 9%, currently sits at around 7%. This is a clear indication that the previous monetary policy goals are falling short, requiring reevaluation.

The loan provisioning system also needs reform. Forcing banks to provision 100% within a year of non-repayment leads to unnecessary pressure, especially when borrowers are requesting time to recover. Immediate recovery processes, including photo publications of borrowers, do not solve underlying liquidity issues in the market.

Today, banks are issuing loans based on property valuations, but when they attempt to recover the same loan, asset values in urban areas have dropped by 30–40%, and even more in rural regions. The issue is not collateral weakness, but rather the lack of cash flow in the broader economy.

Hence, the upcoming monetary policy must focus on these root problems: asset disposal mechanisms, regulatory harmonization, loan provisioning flexibility, risk-aligned sectoral lending, and a realistic assessment of credit targets.

In sum, Nepal’s banking sector doesn’t just need short-term fixes—it requires deep, strategic reforms, and the central bank must rise to that challenge with clear, actionable, and forward-looking monetary instruments.

(Remarks made by Nepal Bankers’ Association President Koirala during a pre-monetary policy discussion program organized by the SEJON)