The non-performing loans (NPL) of commercial banks surged to 4.86 percent of total lending in the first quarter of the fiscal year, reflecting growing stress in the banking sector amid sluggish economic activity and weak loan recovery.
NPL levels of nine banks have crossed five percent—a level considered concerning by industry standards. Himalayan Bank had the highest NPL of 7.39 percent at the end of first quarter. NIC Asia (6.99 percent), Kumari (6.98 percent), Nepal Investment Mega (6.63 percent), Prime Commercial (5.86 percent), Prabhu (5.78 percent), Nepal Bank (5.49 percent), Laxmi Sunrise (5.42 percent) are the other banks with NPL levels exceeding five percent of their total lending.
Everest Bank Ltd has a lowest NPL level of just 0.74 percent. The unaudited financial results of the review quarter of 20 commercial banks shows 14 reported a rise in bad loans, while only five managed to reduce their NPL ratio. One bank’s NPL level remained unchanged.
The average NPL ratio stood at 4.44 percent at the end of the previous fiscal year in mid-July, when only three banks had bad loans above five percent. The deterioration in banks’ asset quality over the past three months signals the increasing difficulty that borrowers are facing in servicing debts.
Bankers attribute the rise in NPLs to reduced business confidence and the temporary disruption in credit and repayment activities due to the GenZ protests on September 8 and 9 when several industries and business houses were targeted.
Under Nepal Rastra Bank’s regulations, loans overdue for less than three months are categorized as performing, while those overdue for more than three months are classified as substandard, doubtful, or bad, depending on the duration of default. Banks are required to maintain higher loan-loss provisions for these categories. High provisioning has been affecting profitability of commercial banks in recent months.
The International Monetary Fund (IMF) has questioned the accuracy of NPL figures reported by banks, suspecting that some banks may have engaged in “evergreening”—the practice of issuing new loans to repay old ones to mask defaults. It set an independent audit of Nepali commercial banks as a condition for the Extended Credit Facility (ECF). As per the government’s commitment, Nepal Rastra Bank (NRB) has hired a Bangladeshi firm for the portfolio review of 10 largest commercial banks in the country.
Despite improved liquidity and a decline in interest rates, rising NPLs suggest that credit risks remain high and that banks may need to tighten their lending and recovery strategies to safeguard balance sheet stability.
