Loan Portfolio Review Warns of Capital Pressure on Major Banks

Nepal’s loan portfolio review has revealed that several major commercial banks face mounting pressure on their capital reserves, with stricter loan-loss provisioning threatening to push some below regulatory thresholds. The review, conducted by Bangladeshi consultancy firm Howladar Yunus & Company at the request of Nepal Rastra Bank (NRB), highlights weak loan quality, rising non-performing loans, and risky practices such as “evergreening” of large project loans.

According to NRB sources, some banks will need to make additional loan-loss provisions, which could push their capital adequacy ratios below regulatory thresholds. “If more losses are provisioned, some banks’ capital funds may fall below the required level,” an NRB source said, “Though immediate corrective action may not be necessary.”

NRB requires banks to maintain a minimum core capital ratio of 8.5 percent and a total capital adequacy ratio of 11 percent. As of mid-January 20826, the average core capital of commercial banks stood at 9.48 percent and total capital at 12.49 percent. Ten banks — including Global IME Bank, Nabil Bank, Nepal Investment Mega Bank, Rastriya Banijya Bank, Kumari Bank, Laxmi Sunrise Bank, Prabhu Bank, Himalayan Bank, NMB Bank, and NIC Asia Bank — were included in the review. Among them, Himalayan Bank, NIC Asia Bank, Kumari Bank, Rastriya Banijya Bank, Prabhu Bank, and NMB Bank reported core capital ratios below 9 percent.

The report warned that further provisioning could push ratios below the required levels. NRB regulations stipulate corrective measures if capital adequacy falls short, ranging from restrictions on dividend distribution, branch expansion, and executive benefits to halting deposit and loan growth, and in severe cases, declaring a bank problematic.

The NRB board approved the report last week, three months after submission. The central bank is now preparing to instruct banks to address deficiencies through its Regulation and Supervision Department.

The review found that the average non-performing loan (NPL) ratio among the selected banks was 7.7 percent. It also noted instances of “evergreening,” where banks extended new loans to large projects to mask repayment difficulties. Many project loans lacked adequate site inspections or proof of physical progress, raising concerns about loan quality.

Under NRB rules, loans overdue by one month must be placed under watch list, six months under substandard category, up to one year under doubtful loans, and more than one year under bad loans. Banks must provision 1 percent for performing loans, 5 percent for watch-list loans, 25 percent for substandard, 50 percent for doubtful, and 100 percent for bad loans.

The consultancy assessed banks’ loan policies, classification practices, collateral valuation, provisioning, and regulatory compliance. It reviewed loan files, core banking systems, project investment status, and repayment records.

NRB contracted Howladar Yunus & Company on August 28, 2025, with a five-month deadline. The report was submitted in mid-December to mid-January. The International Monetary Fund (IMF) had required Nepal to conduct loan quality reviews of 10 major banks before extending its Extended Credit Facility, prompting NRB to hire the international consultant through a bidding process.