Bank directors fear arbitrary arrests after banker detentions, Say confidence crisis deepening

KATHMANDU: Directors of banks and financial institutions have expressed growing fear and uncertainty following recent arrests of banking officials, warning that a climate of psychological insecurity is undermining confidence in Nepal’s financial sector and slowing investment activity.

The concerns surfaced after the arrest of Nepal Investment Mega Bank Chief Executive Officer Jyoti Prakash Pandey, with banking leaders saying the incident has created anxiety across the sector.

Speaking at a pre-scheduled press interaction organised by the Confederation of Banks and Financial Institutions Nepal (CBFIN) on Thursday, CBFIN Chairman Prachanda Bahadur Shrestha said bank executives and directors are increasingly operating under fear.

“In a time when people are being detained almost every day, who would not be afraid?” Shrestha questioned, responding to queries regarding the current mood within the banking sector.

He argued that recent arrests reflected a lack of understanding regarding the legal rights of banks over pledged collateral, stressing that banks hold the primary claim over collateral assets under existing financial arrangements.

“The current actions have created serious psychological fear without properly understanding the banking system and banks’ legal rights over collateral,” he said.

‘We Are Afraid if the State Detains Without Hearing’

CBFIN Senior Vice-President Rajesh Upadhyay said concerns stem not from accountability itself, but from fears of arbitrary action without due process.

“If the state chooses to detain people without hearing them, then all of us are afraid,” Upadhyay said. “But if the government follows a policy of hearing first and taking action later, then there is no need to fear.”

Bankers argued that this prevailing psychological fear has also contributed to sluggish credit growth, despite ample liquidity and historically low interest rates in the banking system.

According to them, restoring lending momentum requires rebuilding confidence among domestic investors first, which in turn would encourage foreign direct investment.

“The investment environment the government wants cannot emerge overnight,” Upadhyay said. “Foreign investors will gain confidence only when domestic investors themselves feel confident. Otherwise, foreign capital will also hesitate to enter.”

Low Interest Rates but Weak Credit Demand

Banking officials noted that although loans are currently available at some of the lowest interest rates in Nepal’s history, credit expansion remains weak.

They attributed the slowdown partly to the continued migration of young Nepalis abroad and deteriorating business sentiment among entrepreneurs, factors they say are suppressing investment appetite.

The officials also pointed to shrinking profitability within the banking sector, claiming banks are earning only 96 paisa in profit for every Rs 100 invested, highlighting increasing operational and regulatory pressures.

Pressure from Rising Non-Performing Loans

CBFIN representatives also raised concerns over the treatment of non-performing loans (NPLs) and tax provisions affecting the banking sector.

According to bankers, while financial institutions are permitted to adjust tax liabilities for bad loans up to the threshold of five percent NPLs, any amount beyond that limit cannot be adjusted for tax purposes, forcing banks to shoulder higher tax burdens even during periods of declining profitability.

Although banks can later claim tax adjustments if such loans become regularised, they said the current economic slowdown and declining earnings have made the system increasingly difficult to manage.

Structural Economic Problems Hurting Lending

Banking leaders further argued that Nepal’s economy is facing structural weaknesses, making it inappropriate for the central bank to force financial institutions into mandatory directed lending programmes.

CBFIN General Secretary Manoj Kumar Goyal said sectors such as agriculture and other priority lending categories are facing difficulties due to weak market management and broader economic inefficiencies.

“Problems in directed lending, including agricultural loans, stem from structural weaknesses in the economy and poor market management,” Goyal said.

He added that reduced money circulation across the market has created challenges not only for the broader economy but also for banks, though he stressed that financial institutions themselves are not weakening due to internal failures.

Call for Reform in NPL Classification

Bankers also called for reforms in Nepal’s current non-performing loan classification system, arguing that it is stricter than those followed in neighbouring countries.

They noted that in countries such as India, loans are often classified as non-performing only after borrowers fail to regularise principal and instalment payments over a longer period, sometimes extending up to three years.

Banking officials urged policymakers to introduce more flexible regulatory provisions in Nepal to help financial institutions better manage distressed loans during periods of economic slowdown.