Nepal's banks are posting record deposits, comfortable capital ratios, and strong profits — yet underneath that healthy surface, bad loans have more than tripled in just three years. Nepal Rastra Bank (NRB) itself calls this "the single largest challenge" facing the banking sector right now. Here's exactly how bad the problem has gotten, why it's happening, and the three-pronged plan NRB is building to fix it — including a long-debated Asset Management Company law that may finally become reality.
Nepal's rising bad loan problem, by the numbers
Current State of NPLs in Nepali Banks — Key Numbers
According to NRB's seventeenth Financial Stability Report, the industry-wide non-performing loan (NPL) ratio across all banks and financial institutions reached 4.62% as of mid-July 2025, up from 3.86% a year earlier and just 1.31% three years before that. In rupee terms, total NPLs across the sector jumped to Rs 258.19 billion from Rs 199.66 billion — a roughly 29% increase in a single year. The trend has continued climbing since: by mid-February 2026 the average ratio reached 5.42%, and NRB's most recent quarterly data for FY 2025/26 puts it at 5.60% across the 20 commercial banks. Blacklisted borrowers, meanwhile, have crossed 130,000 — a clear sign of how widespread loan distress has become.
Why Asset Quality Is Deteriorating (Construction, Real Estate, Margin Lending)
NRB's Bank Supervision Report attributes the deterioration to a mix of macroeconomic disruption, sector-specific downturns, aggressive lending during earlier boom years, and governance weaknesses inside the banks themselves. Three sectors stand out as particular pain points: construction and land development, where nearly 65% of total bank loans are backed by real estate collateral that has struggled to sell amid a prolonged property-market slowdown; margin lending against shares, which turns sour quickly whenever the NEPSE index corrects; and businesses that expanded aggressively during the post-pandemic credit boom without the cash flows to sustain their debt once growth slowed. Perhaps more concerning than the headline ratio is the composition shift within the bad-loan pool itself — a growing share of NPLs are migrating into the "loss" category, meaning banks now consider them essentially unrecoverable, rather than being nursed back to health through restructuring.
Bad loans are getting harder to recover, not just more numerous
NRB's Loan Portfolio Review of 10 Commercial Banks
In a striking move, NRB commissioned a loan portfolio review covering 10 large commercial banks, and the results — published in May 2026 — revealed genuinely concerning practices. The average NPL ratio among these 10 banks stood at 7.6%, notably higher than the officially reported industry average, with capital adequacy at 11.30%. More troublingly, the review found evidence of loan "evergreening" (rolling over bad loans to avoid classifying them as non-performing), overvaluation of collateral, and under-provisioning for bad debt — practices that effectively let banks inflate their reported financial health. This review has become one of the key pieces of evidence pushing NRB toward more structural, rather than cosmetic, fixes.
How Nepal's NPL ratio has climbed since 2022
What Is the Proposed Asset Management Company (AMC) Law?
An Asset Management Company — often called a "bad bank" — is a specialised entity designed to buy distressed loans and collateral off banks' balance sheets, freeing them up to lend again while the AMC handles the slow work of recovery. Nepal has debated creating one for nearly two decades; an early task force concluded banks already had sufficient legal authority to recover loans on their own. That view has shifted sharply since the pandemic. NRB proposed the AMC concept again in a recent monetary policy and began drafting an Asset Management Act, and the government's FY 2025/26 budget formally committed to establishing one to manage "bad loans and non-banking assets." The most recent budget for FY 2026/27 goes a step further, calling for a "National Asset Management Company with special legal powers" and — new this time — a defined implementation timeline.
The mechanics are still being worked out. The AMC would purchase non-performing assets — primarily real estate — from banks and gradually resell or lease them to recover value over time. Nepal Bankers' Association leadership has proposed a public-private partnership model, with joint ownership between government and financial institutions, partly to work around procedural hurdles like delayed local-government approvals for property transactions. The single biggest open question is funding: raising the capital needed to buy up distressed assets at scale remains, in the words of one NRB official, "a major question" without a clear answer yet.
Loan Restructuring & Partial Moratorium for Sick Industries
Alongside the AMC law, NRB is using more immediate tools to relieve pressure on struggling borrowers. The Monetary Policy for 2026/27 explicitly commits to facilitating "the management of NPL-distressed industries" and has extended a partial moratorium to crucial sectors including construction, land development, and building construction — giving genuinely distressed but viable businesses breathing room rather than pushing them straight into default. Separately, NRB has clarified that capitalising unpaid interest during a construction or moratorium period doesn't automatically count as loan restructuring, sparing qualifying long-term infrastructure projects from harsher provisioning treatment. For projects hit by natural disasters, banks can extend grace periods with reduced provisioning requirements, provided all overdue principal and interest are cleared first.
What This Means for Bank Depositors and Shareholders
For ordinary depositors, the immediate risk remains low — capital adequacy, liquidity, and leverage ratios across the system all sit comfortably above regulatory floors, and Nepal's deposit base continues to grow steadily. For bank shareholders, however, rising NPLs mean higher provisioning requirements, which directly eat into profitability and can pressure dividend payouts, especially at banks like NIC Asia and Prabhu Bank that currently carry NPL ratios well above the system average. Investors in bank shares should watch quarterly NPL disclosures closely, since a bank's headline profit figures can mask a deteriorating underlying loan book if provisioning hasn't kept pace with actual asset-quality decline.
Risks If NPLs Continue Rising
NRB's own stress tests found that more than half of commercial banks would struggle under even a moderate credit shock — a warning sign that shouldn't be ignored just because current capital ratios look healthy today. The situation is considerably more severe among weaker development banks: Narayani Development Bank's NPL ratio has reached over 57%, and NRB has already placed the troubled Karnali Development Bank under management control after its deposit base collapsed and capital fund turned negative. That said, industry voices caution against overreaction — Nabil Bank's CEO has pointed out that Nepal's roughly 5.6% NPL ratio, while clearly rising, remains among the lowest in South Asia, and has warned that overly punitive policies toward distressed borrowers could make recovery harder rather than easier. The real risk isn't necessarily a single large bank failing, but a slow, system-wide erosion of lending capacity if banks become too cautious to extend the credit Nepal's economy needs to grow.
Frequently Asked Questions (FAQs)
1. What is Nepal's current NPL ratio?
The industry-wide non-performing loan ratio reached 4.62% as of mid-July 2025 and has since climbed to around 5.60% based on the latest quarterly data for FY 2025/26.
2. What is an Asset Management Company (AMC) and why does Nepal need one?
An AMC, sometimes called a "bad bank," buys distressed loans and collateral off banks' balance sheets to help them recover value over time and free up banks to lend again. Nepal is drafting legislation to establish one after nearly two decades of debate.
3. Which banks currently have the highest NPL ratios in Nepal?
Among the 20 commercial banks, NIC Asia Bank and Prabhu Bank currently carry some of the highest NPL ratios, both close to 8.85%, based on recent quarterly data.
4. Are Nepali banks at risk of failure due to rising bad loans?
Capital adequacy and liquidity remain above regulatory requirements system-wide, but NRB's own stress tests show more than half of commercial banks would face significant strain under a moderate credit shock, and some development banks are already under serious distress.
5. What relief is available for distressed businesses with bad loans?
NRB has introduced a partial moratorium for sectors like construction and land development, along with provisions allowing interest to be capitalised during construction periods without automatically triggering stricter loan-restructuring classifications.
Conclusion
Nepal's bad-loan problem has gone from a manageable, single-digit statistic to a genuine policy priority in the space of three years, and NRB's response — tighter supervision, targeted relief for distressed industries, and finally, a real push toward an Asset Management Company — reflects that shift. Whether the AMC law actually solves the underlying problem, as critics like Nabil Bank's CEO rightly caution, will depend far more on execution and funding than on the legislation itself. For now, keeping an eye on quarterly NPL disclosures remains the clearest way to track whether Nepal's banking sector is stabilising or still sliding.
Want to stay ahead of Nepal's banking sector developments as they unfold? Follow Bandhu Fintech for clear, timely breakdowns of what NRB's policies actually mean for your money.
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