The Governance Gap

For three consecutive years, the annual supervision reports of Nepal Rastra Bank (NRB) have flagged the same governance failures in the country's commercial banks: boards spending more time approving loans than overseeing risks, failure to meet female director requirements and ignoring or poorly handling CEO performance reviews. The Bank Supervision Report 2024/25, based on intensive on-site inspections, shows these problems persist. But it also reveals a more serious concern: loans that were transferred to the personal accounts of board directors and their associates shortly after their disbursements.

The findings come at a time when Nepal's banking sector is under heightened scrutiny. Earlier this year, an IMF-backed loan portfolio review of the country's 10 largest commercial banks found an average non-performing loan (NPL) ratio of 7.7%—significantly higher than what banks had reported. The review also uncovered evidence of evergreening, inflated collateral valuations and inconsistent loan classification. The political climate has added to the pressure. Following the September 2025 unrest, public debate over governance, accountability and transparency has intensified. Concerns about bank boardrooms are no longer confined to regulators and industry insiders; they have become part of a wider national conversation about institutional accountability.

Loans to insiders

The most serious finding in this year's report is the violations of end-use monitoring requirements under Section 56 of the Bank and Financial Institutions Act (BAFIA), which requires banks to verify that loans are used for their stated purpose through site visits, document verification and monitoring of disbursement accounts. NRB's post-disbursal audits found cases where those safeguards were broken down entirely. "Inspection observations also indicated instances in which funds were transferred to accounts associated with directors or related entities shortly after disbursement," the report states. This is not a minor compliance lapse. If loan proceeds were deliberately diverted, such actions could amount to an offence under BAFIA.

This issue is not new. The 2022/23 supervision report identified a similar pattern of loans being used for purposes other than those stated in loan applications. At the time, the report noted that such cases had not been referred to Nepal Police or other investigative agencies for necessary action.

Whether this year's findings will trigger a formal investigation remains to be seen.

The central bank has demonstrated a willingness to enforce regulations. In 2024/25 alone, it took action against 28 banks and financial institutions, issuing fines and warnings to institutions, including Standard Chartered and Laxmi Sunrise, for governance and compliance violations. However, loan diversion personal accounts represents a far more serious governance issue, and there has been no public indication that the matter has been escalated beyond the supervisory level.

Parshuram Kunwar Chhetri, a former banker, says the regulator's response to these issues is important. "There is an urgent need for more rigorous oversight of loan utilization," he said. "If a loan has been issued as working capital, it is critical that the funds are verified for that specific use. The NRB must take a more proactive role in enforcing these standards. If banks fail to monitor the actual end-use of loans, the regulator needs to step in with firm corrective actions, ranging from formal warnings to more stringent penalties."

Self-declarations versus reality

Another major theme running through the report is the gap between what banks report to the regulator and what inspectors find on the ground. For years, banks have relied heavily on paper-based self-declarations to demonstrate compliance with credit-utilization requirements and borrower profiles. According to NRB inspectors, these declarations increasingly fail to reflect reality. The report found weak post-disbursal monitoring across many institutions. Banks have not significantly strengthened credit review processes, and many still lack Management Information Systems (MIS) capable of tracking how loan funds are used after disbursement.

In response, NRB is pushing banks to conduct physical site visits and auditor-certified inspections instead of relying primarily on self-reported compliance. The report notes resistance from some institutions accustomed to lighter oversight, which is perhaps unsurprising given how long the self-declaration model has been the norm.

Bhuvan Kumar Dahal, another former banker, acknowledges the challenge. "On the subject of loan utilization, it is admittedly difficult for banks to track how funds, such as overdraft (OD) loans, are being spent once they are disbursed," he said. "This practical challenge is likely why monitoring remains a persistent issue."

This finding mirrors conclusions from the IMF-backed loan portfolio review of Nepal’s 10 largest banks conducted by Bangladeshi firm Howladar Yunus & Co. The review identified evergreening, inflated financial projections and inconsistent valuations, essentially the same gap between reported numbers and underlying reality that the central bank’s supervisory report describes. According to the review, two banks recorded NPL levels above 10%, while several failed to meet capital adequacy requirements. NRB has said banks will be given an opportunity to respond before corrective measures are determined.

CEOs grading their own watchdogs

The report also raises concerns about the independence of internal risk and audit functions.

Inspectors found that CEOs in many banks are directly conducting performance appraisals of Chief Risk Officers (CROs) and Heads of Internal Audit. In principle, these positions exist to provide independent oversight of management decisions. When their career progression and performance ratings depend on the CEO, their ability to challenge lending decisions or risk-taking behavior is inevitably weakened.

The NRB report states that this dynamic has allowed risk oversight functions to become subordinate to short-term business objectives such as deposit mobilization and loan growth. Chhetri argues that the solution requires structural reform. "There is a clear need for greater independence in the risk management function," he said. "Currently, the risk committee operates under a hybrid model that includes management personnel, which often leads to a conflict of interest. Risk management should be structured similarly to the audit committee, reporting directly to a board-level committee rather than through management."

Dahal, however, believes board structures should be reviewed more broadly. "There is a strong case for re-evaluating the composition of our board-level committees, similar to the model seen in India," he said. "There is significant value in having management representatives on the board. For instance, there is high female participation within management, and this expertise should be reflected at the board level to ensure diverse and informed decision-making."

Boards overloaded, audits understaffed

Many of the governance concerns highlighted in the previous supervision reports are yet to be resolved. Inspectors found board meetings carrying more than 100 agenda items in some cases, leaving little time for discussion of risk indicators or stress-testing results. Boards had delegated key responsibilities, such as approval of product papers, to CEOs, while many lacked mechanisms to track whether their own past decisions had been implemented.

The report also found that appointments of public and promoter directors were often made through board decisions and later ratified at annual general meetings, rather than being subjected to genuine voting by shareholders.

A newer concern is the condition of internal audit departments. NRB found that Risk-Based Internal Audit (RBIA) units were understaffed, with some banks relying heavily on trainees rather than permanent qualified professionals. The result is a growing backlog of unresolved audit findings sitting and a failure to conduct mandatory information security and policy audits. Given that internal audits serve as one of the final lines of defense when governance and risk controls fail, the staffing gap is particularly concerning.

Three years of the same warnings

When compared with the previous two supervision reports, the latest findings reveal a pattern of recurring problems. Banks still lack systems to monitor implementation of board decisions, an issue raised in the 2023/24 report. Several banks continue to fall short of the requirement under Section 86(2) of the Company Act to appoint at least one female director, even though the issue was first raised in 2022/23. Concerns about CEO performance appraisals have also evolved into a broader issue involving CEO oversight of the CROs and audit heads. Both former bankers view the recurrence of these issues as evidence of weak follow-up.

"When the NRB raises valid concerns, they should be addressed at the root rather than simply being repeated in subsequent audits," Chhetri said. "This recurring cycle suggests that current follow-up mechanisms are ineffective, and it is the responsibility of the NRB to ensure that these issues are properly resolved rather than just noted." Dahal agreed with Chhetri. "NRB’s valid concerns should be resolved permanently. However, we find ourselves addressing the exact same points in subsequent reports,” he added.

NRB’s enforcement records show that dozens of banks and financial institutions have been fined or warned over the past year for violations ranging from money-laundering compliance failures to capital shortfalls and preferential lending. But many of the governance weaknesses repeatedly identified in supervision reports—board composition, oversight of implementation and appraisal independence— continue to resurface. Whether that reflects insufficient enforcement or ineffective corrective measures remains unclear. Only the NRB can answer that.

What happens next?

The findings of both the IMF-backed loan portfolio review and NRB’s supervision report point to the same conclusion: the gap between what banks report and what is actually happening inside their institutions may be wider than previously acknowledged.

NRB has said that banks will be allowed to respond to the loan portfolio review findings before any corrective measures are imposed. Additional provisioning requirements and capital injections remain among the possible outcomes.

Meanwhile, the IMF's latest review of Nepal's economic program has called for amendments to the NRB Act aimed at strengthening the central bank's governance, independence and accountability.

That suggests the debate over governance failures in the banking sector may not be limited to commercial banks. It may extend to how the regulator itself is structured, and whether NRB has the tools and the institutional independence needed to ensure its findings lead to meaningful change.

(Originally published in July 2026 issue of New Business Age magazine.)