Nepal bankers alarmed as central bank moves to relax blacklisting rules, Warn of rising loan default risks

KATHMANDU: Nepal’s banking sector has expressed growing concern after the Nepal Rastra Bank signaled plans to make blacklisting provisions more flexible, even as banks continue to struggle with rising non-performing loans (NPLs) and weak credit recovery.

The central bank, which had recently softened provisions related to cheque bounce cases, is now studying further relaxation of blacklisting rules. Governor Bishwanath Paudel reportedly discussed the issue with business leaders in Birgunj, stating that an increasing number of individuals being blacklisted is shrinking the pool of eligible borrowers and limiting entrepreneurial activity in Nepal’s economy.

However, the proposal has triggered unease across Nepal’s financial system, with bankers warning that easing blacklisting criteria could significantly weaken credit discipline and increase default risks.

Rising Defaults, Weak Recovery Environment

Bankers argue that relaxing blacklisting policies at a time when loan recovery is already under pressure could send the wrong signal to borrowers. “This could encourage a culture of non-repayment,” said a senior banker, adding that the move risks undermining financial stability and responsible lending practices.

According to data from the Credit Information Bureau Nepal, a total of 169,921 individuals are currently blacklisted. Of these, 53,571 were added in the current fiscal year alone. Among them, 34,770 cases stem from cheque bounce incidents, while 18,801 are linked directly to unpaid loans.

Bankers highlight that the rising numbers are not solely driven by large business defaults but also include retail borrowers—such as credit card users, phone loan borrowers, and individuals financing vehicles or housing—who have failed to repay loans.

Financial Default and Cheque Bounce Trends (FY 2075/76 – FY 2081/82)

Policy Concerns: “Wrong Diagnosis of the Problem”

Industry insiders say the central bank’s approach may be based on a flawed interpretation of the data. “Not everyone on the blacklist is a productive entrepreneur who deserves policy leniency,” one banker noted. “Cheque bounce cases are being mixed with loan defaults, which distorts the real picture.”

Another banker emphasized that cheque bounce issues are often private transactional disputes rather than systemic banking failures, and should be treated separately from loan delinquency.

Previously, borrowers with loans below Rs 1 million were not included in the blacklist. After this threshold was removed, the number of blacklisted individuals surged, reflecting increased participation from small-ticket borrowers rather than a structural rise in large-scale defaults.

Systemic Risk vs. Financial Inclusion Debate

The central bank’s rationale—expanding financial inclusion and preserving credit access—has sparked a broader debate between growth-oriented policy reform and financial risk management.

Bankers warn that altering blacklisting provisions without robust risk segmentation could lead to a deterioration in asset quality, ultimately increasing bad loans and pressuring Nepal’s banking sector balance sheets.

“There is already a fragile recovery in the credit cycle. If this system is loosened, banks could face serious repayment challenges,” another banker said.

Alternative Reform Proposals

Instead of diluting blacklisting rules, bankers have suggested targeted reforms—such as allowing blacklisted borrowers to maintain active bank accounts. This, they argue, would enable better transaction tracking and improve recovery prospects without compromising credit discipline.

“Keeping accounts operational allows monitoring of financial flows and makes repayment easier, while still maintaining accountability,” a banker explained.

They also stress that the current blacklisting system plays a critical role in enforcing repayment behavior, as being blacklisted carries reputational and financial consequences that compel borrowers to settle dues.

Broader Implications for Nepal’s Financial Stability

The debate comes at a time when Nepal’s banking sector is navigating liquidity pressures, slowing credit growth, and evolving regulatory frameworks. Any abrupt policy shift, analysts say, could impact investor confidence, banking sector stability, and overall economic recovery.

Bankers caution that if relaxed policies lead to a spike in bad loans, the central bank itself may later face criticism for enabling risky lending practices.

As Nepal pushes for economic growth, financial inclusion, and private sector expansion, the challenge remains balancing credit accessibility with prudent risk management—ensuring that reforms do not compromise the integrity of the banking system.