NRB board approves loan portfolio review report, Prepares directives for commercial banks over irregularities

KATHMANDU: The board of Nepal’s central bank, Nepal Rastra Bank, has approved the long-awaited loan portfolio review report of the country’s 10 largest commercial banks, paving the way for regulatory directives against banks found with serious irregularities in lending practices, multiple sources familiar with the matter said.

Following approval by the NRB board, the report will now be forwarded to the Bank Supervision Department, which is expected to formally communicate with concerned banks, seeking explanations and corrective measures based on the findings highlighted in the review.

According to central bank sources, the report underwent discussions at multiple levels within the board before receiving formal approval. Regulators are now preparing institution-specific instructions targeting weaknesses identified in loan classification, capital adequacy, provisioning, and lending governance.

The review was conducted as part of Nepal government commitments under the Extended Credit Facility (ECF) agreement with the International Monetary Fund, which required an independent assessment of loan portfolios at major commercial banks to strengthen financial sector transparency and resilience.

An international audit review of the banks’ lending books was carried out by Bangladesh-based audit firm Howladar Yunus & Co., whose findings reportedly uncovered significant deficiencies in credit monitoring and loan management practices.

Rising Concerns Over Bad Loans and Evergreening

The report has reportedly highlighted a sharp increase in non-performing loans (NPLs) compared to figures publicly disclosed by banks.

While the 10 major banks had collectively reported around 5.5 percent non-performing loans as of mid-April 2025 (Chait-end 2081 BS), the independent loan portfolio review reportedly found actual bad loans to be above 7.7 percent, according to sources at Nepal Rastra Bank.

Among the banks reviewed, three commercial banks reportedly crossed the 10 percent NPL threshold, with two institutions approaching nearly 11 percent non-performing loans, raising concerns about asset quality and banking sector stability.

“The review suggests non-performing loans among the 10 banks range between 4 percent and 11 percent, with no bank remaining below 4 percent,” a source familiar with the report said.

A major concern identified in the report is the alleged prevalence of loan evergreening practices — a process in which banks extend new loans to struggling borrowers to settle old problematic debts, effectively delaying recognition of bad loans.

The review also reportedly found irregularities in loan classification, inadequate loan-loss provisioning, and inconsistent asset valuation methodologies among commercial banks.

Capital Adequacy Issues Identified

The report is also said to have flagged concerns over capital adequacy ratios, with some banks reportedly failing to meet minimum regulatory thresholds set by Nepal Rastra Bank.

Sources said that Himalayan Bank and Rastriya Banijya Bank were found to have insufficient total capital funds under the review.

Under NRB regulations, commercial banks are required to maintain a minimum capital adequacy ratio of 11 percent.

Financial statements published for the quarter ending Chait 2081 BS showed Himalayan Bank’s capital adequacy ratio at 10.84 percent, while Rastriya Banijya Bank had reported 11.01 percent, close to the regulatory floor. However, the independent review reportedly suggested further pressure on capital buffers.

Sources, however, said neither bank appears to face immediate prompt corrective action requirements at this stage.

Additionally, primary capital adequacy concerns were reportedly observed at NIC Asia Bank, Himalayan Bank, Kumari Bank, and Prabhu Bank.

Nepal Rastra Bank has already granted preliminary approval to NIC Asia Bank for a 50 percent rights share issuance aimed at strengthening capital. Himalayan Bank, despite issuing an Further Public Offering (FPO), reportedly remains below regulatory benchmarks in core capital.

Meanwhile, Kumari Bank and Rastriya Banijya Bank have shown signs of improving recovery trends, potentially easing pressure on capital ratios depending on final audited financial statements.

Banks to Face Explanations and Corrective Directives

According to sources, Nepal Rastra Bank will formally send the review findings to the banks, requiring responses and clarification on deficiencies identified in the report.

Banks failing to provide satisfactory explanations could face additional provisioning requirements, loan reclassification, or other supervisory actions based on the seriousness of the issues.

The report reportedly highlighted serious concerns including inflated financial projections by borrowers to secure larger loans, weak due diligence, and inconsistent collateral valuation standards across institutions.

It also found cases where overdue loans were allegedly not classified according to NRB regulations, resulting in insufficient provisioning against credit risk.

After receiving responses from banks, the central bank is expected to evaluate explanations and issue institution-specific regulatory instructions, potentially reshaping Nepal’s banking sector oversight amid rising concerns over financial stability, bad loans, and credit quality.