Hydropower, real estate loans under scrutiny as central bank strengthens banking oversight

KATHMANDU: Nepal Rastra Bank (NRB), the central regulatory authority, has issued a comprehensive new circular tightening rules for commercial (A class), development (B class), and finance (C class) banks. The circular, released in 2024, introduces significant directives aimed at addressing long-standing weaknesses in credit disbursement, loan classification, financial reporting, and governance practices within Nepal’s banking sector.

Key Highlights of the Circular

Loan Loss Provisioning and Write-back Restrictions

Banks are now required to increase loan-loss provisioning. Any restructuring or rescheduling of loans made during the COVID-19 period (up to mid-July 2021) must be strictly reviewed.

Write-back of such provisions will not be allowed until proper financial evaluation is completed, signaling a stricter approach towards “evergreening” of bad loans.

Agriculture & SME Financing

The NRB mandates banks to allocate a minimum percentage of their loan portfolio towards agriculture, SMEs, and deprived sectors.

The circular makes clear that failure to meet these targets will invite regulatory action. Banks are required to channel loans into productive sectors rather than concentrating heavily on real estate and unproductive lending.

Green & Renewable Energy Financing

In line with the government’s sustainable finance agenda, banks must now prioritize loans for clean energy, including projects with Green Stickers such as electric vehicles.

A 2% incentive provisioning reduction has been announced for verified green projects, encouraging banks to align with Nepal’s climate commitments.

Term Loan Interest Capitalization (ICTL) Rules

The circular introduces stricter measures on Interest Capitalized Term Loans (ICTL).

Banks can no longer freely capitalize unpaid interest during the moratorium period. Instead, such interest must be transferred into a separate Interest Capitalized Reserve (ICR) account.

This move is designed to prevent artificial inflation of profits and ensure transparency in loan accounting.

Hydropower & Infrastructure Lending

Hydropower projects, often a major focus of commercial lending, are subjected to tighter scrutiny.

Banks must ensure that any project reaching financial closure complies with updated risk-assessment frameworks, with mandatory provisioning up to 60% in case of delays or defaults.

Payment System & Digital Banking Compliance

The circular stresses compliance in the fast-growing digital banking sector.

Banks must integrate with the National Payment Switch, regulated by Nepal Clearing House Ltd (NCHL), to enhance transparency in fund transfers, remittances, and digital wallets.

This aims to curb money laundering, ensure traceability of transactions, and promote a cashless economy.

Stricter Governance and Credit Monitoring

Banks are directed to improve credit monitoring, particularly in sectors like real estate, margin lending, and overdrafts.

Governance failures, weak internal audits, and reckless credit expansions will now attract personal liability on board members and chief executives.

Why the Circular Matters

NRB’s move reflects growing concerns about Nepal’s financial stability. Over the past decade, banks have been criticized for reckless lending in real estate, hydropower, and share-backed loans, which created systemic risks. By imposing stricter provisioning norms and limiting write-backs, NRB aims to clean up balance sheets and force banks to disclose true financial health.

The emphasis on agriculture, SMEs, and green finance also shows an attempt to reorient credit towards the “real economy” rather than speculative bubbles. At the same time, hydropower and infrastructure lending — traditionally considered national priorities — are being placed under tighter oversight to minimize risks from stalled projects.

Digital banking reforms are another major thrust. By requiring all banks to integrate with the National Payment Switch, NRB is tightening its grip on transaction transparency and aiming to reduce tax leakages.

Impact on the Banking Sector

Short-term: Banks may face profitability pressures due to higher provisioning requirements.

Medium-term: Lending patterns are expected to shift towards priority sectors, potentially boosting agriculture, SMEs, and renewable energy financing.

Long-term: Financial discipline and transparency are likely to improve, creating a more resilient banking system aligned with international best practices.

In essence, this circular signals NRB’s intent to curb financial mismanagement, strengthen corporate governance, and ensure Nepal’s banking system supports long-term economic growth instead of fueling asset bubbles.