KATHMANDU, June 21: The non-performing loan (NPL) ratio of banks and financial institutions (BFIs) rose to 5.24 percent, marking an increase of 1.26 percentage points over the past year.
According to Nepal Rastra Bank (NRB), as of mid-May 2025, the NPL amounted to Rs 289.56 billion—an increase of Rs 95.80 billion compared to the same period in the previous fiscal year, when the NPL stood at Rs 193.76 billion, equivalent to 3.98 percent of the total loan portfolio of the BFIs.
The NRB attributed the rise in NPLs in recent months to borrowers' reluctance to repay credit and interest due to declining incomes triggered by the ongoing economic slowdown. In response to the deteriorating financial health of BFIs, the NRB raised the permissible NPL limit from 5 percent to 8 percent in March to ease operational pressures on the institutions.
Based on the overdue period of loans issued by banks, the NRB classifies NPLs into three categories: substandard, doubtful, and bad loans. Substandard loans are those whose interest and principal payments are overdue for up to six months. Doubtful loans are those with payments overdue for six months to one year, while bad loans refer to those with overdue periods exceeding one year.
For substandard loans, BFIs are required to maintain 25 percent of the loan amount as provisioning. For doubtful loans, the provisioning requirement is 50 percent, while for bad debts, banks must maintain 100 percent provisioning. According to bankers, an increase in provisioning directly impacts banks' profitability.
Alongside the sharp rise in NPLs, the non-banking assets of BFIs also surged by 63.45 percent over the past year. NRB data shows that non-banking assets rose from Rs 27.6 billion in mid-May 2024 to Rs 45.11 billion in mid-May 2025—an increase of Rs 17.51 billion in just one year.
Non-banking assets are fixed properties kept as collateral by borrowers, which banks auction off when loans turn into bad debt. Banks can write off the provisioning amount of bad debts using proceeds from auctioned collateral.
Among financial institutions, commercial banks recorded a 62.08 percent rise in non-banking assets, while development banks and finance companies saw increases of 55.56 percent and 102.45 percent, respectively.
The NRB’s Annual Bank Supervision Report, released two months ago, highlighted the growing NPLs and accumulation of non-banking assets as the primary challenges facing Nepal’s banking sector. The report warned that these issues have exerted serious pressure on the capital adequacy ratio of BFIs.