Banks in Nepal are increasingly analysing environmental and social risks when disbursing loans. The Nepal Rastra Bank (NRB) had issued a directive three years ago, requiring banks to conduct such risk assessments for loans exceeding Rs 10 million. Additionally, global financial institutions such as the World Bank and the International Monetary Fund (IMF) have recommended similar practices, further driving this trend among banks.

According to data published by NRB on Wednesday, 33% of the total loans disbursed by commercial banks in the fiscal year 2023/24 were evaluated for environmental and social risks. This marks more than a twofold increase compared to the previous fiscal year 2022/23, when only 14% of loans underwent such assessments.

Rastriya Banijya Bank led the sector, with over 90% of its loans disbursed based on environmental and social risk evaluations. In contrast, NIC Asia Bank has yet to implement such assessments in its loan disbursement process, according to NRB’s report.

NRB first introduced environmental and social risk analysis guidelines for banks in 2018. These guidelines were revised in 2022, making it mandatory for banks to conduct risk evaluations for loans exceeding Rs 10 million. However, NRB spokesperson Ramu Poudel clarified that, while this provision is not yet compulsory, banks have voluntarily adopted the practice, aligning with international standards.

As per the guidelines, banks must develop separate operational procedures for environmental and social risk assessments, have them approved by their board of directors, and ensure their implementation. By the end of the last fiscal year, all commercial banks had formulated such procedures.

Furthermore, NRB’s directive mandates banks and financial institutions to require an Initial Environmental Examination (IEE) or an Environmental Impact Assessment (EIA) report before approving loans for projects or industries that legally require such assessments. For projects exempt from IEE and EIA requirements, lending institutions must conduct their own environmental impact analysis before disbursing loans.

Additionally, banks are required to submit reports on their environmental and social risk management procedures to NRB’s Supervision Department within 30 days after the end of each fiscal year.