Non-banking assets are a rising risk in Nepal’s banking system, despite not receiving as much attention as inflation or interest rates. They are a sign of more serious issues with credit risk, loan recovery, and regulatory supervision.
What are Non-banking assets? When a borrower defaults to pay the loan, the loan becomes a non-performing loan (NPL), and the bank can take legal action to recover the debt. When collateral, such as real estate, cars, or machinery, has been pledged as security for a secured loan, the bank has the authority to seize the assets. In order to recover the outstanding loan, the bank may then put these assets for auction. If the auction of seized collateral is successfully completed, the loan is settled.
During settlement if the auctioned amount exceeds the outstanding loan, the bank returns the surplus to the borrower but if the amount is insufficient to cover the debt, the bank may take further legal action to recover the remaining amount. These seized assets acquired by the financial institution after an unsuccessful auction are referred to as non-banking assets (NBAs).
They are no longer utilized in the bank’s main lending activities and hence do not generate income for financial institutes so banks attempt to recover default loans via sale of these NBAs as soon as possible or convert them to banking assets as per the law.
How do assets become non-banking assets? In Nepal's banking sector generally, loans are disbursed against collateral after accurate valuation with repayment terms and mutual agreement between the mortgagee and mortgagor. According to Nepal Rastra Bank (NRB) Directives 2081, loans are classified based on the duration of repayment delays ranging from performing loans (pass and watch list) to non-performing loans (sub-standard, doubtful and loss).
When a loan provided to the borrower is classified as a non-performing loan, the bank offers the borrower an opportunity to repay the loan before initiating legal recovery procedures. The collateral pledged for loans, including real estate, stocks, automobiles, machines, etc. may be seized by the bank in the case that a borrower fails to pay the loan, and the financial institution attempts to recover the loan through public auction. If these seized assets are not purchased by the public through auction, the lender (the bank) self, accepts the assets and it is referred to as non-banking assets. These non-banking assets should be sold as soon as possible however, with the Board decision and approval from Nepal Rastra Bank, such assets may be converted into banking assets if necessary.
A mid-May 2024 report by the NRB shows that NBAs of banks and financial institutes (of “A”, “B” and “C” categories) is Rs 27.6bn till mid May 2024. Now the value has reached to Rs 45.11bn till mid-May 2025 which has been increased by Rs 17.51bn since last year. A significant portion of these assets are held by commercial banks.
The NRB reports that 20 Class “A” financial institutions have non-banking assets valued at Rs 38.48bn as of mid-May 2025, which is an increase by Rs 14.78bn from mid-July 2024. Similarly, development banks have Rs 3.9bn worth of non-banking assets as of mid-May 2025. Likewise, finance companies have Rs 2.72bn worth of non-banking assets as of mid-May 2025. Financial sector’s continuous battle to get rid of mortgaged properties in a slow real estate market post-pandemic are the causes of this spike.
NBAs burdens both sides of the balance sheet. First, they do not generate income, unlike performing loans that yield interest. Second, they come with a significant regulatory burden, as the central bank mandates that banks and financial institutions set aside a 100 percent loss provision once a loan remains overdue for more than a year. Third, NBA represents tie-up capital limiting the bank's liquidity and ability to generate future income. In other words, the longer the NBA stays unsold, the more it strains the bank’s liquidity and profitability. In today’s context, despite frequently publishing notices for an auction, they have been unable to sell these assets.
To prevent the accumulation of NBAs, financial institutions must adopt steps like analysis of assets or projects requiring accurate valuation for asset-backed loans and a comprehensive SWOT (strengths, weaknesses, opportunities, and threats) analysis for project base loans. However, it is important to give high priority on repayment capacity rather than just collateral valuation. For example, an individual taking the loan of Rs 3m for 10 year’s period at 8.5 percent interest rate, backed by Rs 5m collateral may seem low risk but with a monthly income of Rs 60,000 and existing family and living expenses, paying EMI of over Rs 37,000 could be difficult and unmanageable.
Such cases highlight the chances of increasing default risk and hence lead to non-banking assets so, banks must enhance their credit risk assessment processes using advanced analytics, predictive models, and periodic reviews. Leading financial institutions such as JP Morgan Chase (USA), ICICI Bank (India), Standard Chartered Bank (Global) have successfully implemented these models to manage credit risk. In addition to repayment capacity, credit rating systems for borrowers should be established in Nepal. Countries like India and the US use credit scores to assess borrowers risk that helps to improve transparency, reduce risky lending and encourage responsible financial behavior which ultimately helps to prevent loan defaults. Moreover, regulatory bodies must strictly enforce their acts, directives, and circulars.
In Nepal, ineffective regulation is evident as several banks have high NPL rates. While NRB is mandated to intervene if the NPL exceeds five percent, Karnali Development Bank reached an alarming 40.85 percent NPL before NRB took action. It has raised a huge question about delays and inefficiencies in regulatory oversight. A regulatory body in collaboration with financial institutions must conduct a financial awareness program about financial responsibilities, repayment obligations, and the consequences of defaulting to prevent the accumulation of non-banking assets.
Furthermore, NRB should constantly assess the impact of NBAs on key performance indicators such as profitability and capital adequacy so that it can strengthen Nepal’s financial system.The rise in NBAs reflects deeper weakness in Nepal’s financial sector. Without stronger and efficient regulation and constant monitoring, NBAs will continue to threaten stability and it will gradually destroy trust in the banking system.
