The talks of forming an asset management company, or bad bank, has gained ground after the government announced its plans to establish an Asset Management Company (AMC) in the budget for the upcoming fiscal year to manage bad loans and non-banking assets held by banks and financial institutions. 

Presenting the budget for fiscal year 2025/26, Finance Minister Bishnu Prasad Paudel said, “an asset management company will be established to manage bad loans and non-banking assets of banks and financial institutions.” The plan also featured in the government’s policy and programs for 2025/2026.

The High-Level Economic Reform Advisory Commission, led by former Finance Secretary Rameshore Khanal, had also advised the government to form an AMC in light of deteriorating credit recovery rates and an alarming increase in distressed assets across the banking sector.

The concept of AMC started in the 1980s when the US government established the Resolution Trust Corporation (RTC) in 1989 at the height of the savings and loan crisis. Globally, bad banks gained prominence during the 2008 financial crisis. For instance, Ireland established the National Asset Management Agency (NAMA) in 2009, and Spain followed with SAREB in 2012 to resolve toxic assets in their financial systems.

In South Asia, India launched its own bad bank, the National Asset Reconstruction Company Limited (NARCL), in 2021 to help its banks recover from large-scale NPAs. Nepal’s planned AMC is expected to function along similar lines—isolating bad loans and toxic assets from the books of financial institutions so that banks can refocus on lending and core banking activities.

The concept of establishing an asset management company was proposed as early as 2001. At that time, a task force was formed, including former banker Parshu Kunwar Kshetry, Rajan Singh Bhandari, and former executive director of Nepal Rastra Bank, Bhismaraj Dhungana, to conduct a study.

No further action or decision was taken for 25 years. However, as non-performing assets in the banking system increased, the central bank unveiled a plan to open a bad bank through the monetary policy for the current fiscal year, where then-Governor Maha Prasad Adhikari said the central bank would initiate the process for setting up such a company.  In line with this, central bank officials have begun drafting a legal framework for the institution.