Despite having adequate liquidity, Nepal’s commercial banks are facing constraints in expanding credit due to growing pressure on capital adequacy. Rising non-performing loans (NPLs) have pushed the capital base of several banks down to the regulatory minimum, limiting their ability to issue new loans.
According to the latest data published by Nepal Rastra Bank (NRB), at least five commercial banks have reached a point where they cannot expand their loan portfolios further due to insufficient core capital.
Under NRB’s Capital Adequacy Framework 2015, commercial banks are required to maintain a minimum Core Capital Adequacy Ratio (CCAR) of 8.5% and a Total Capital Adequacy Ratio (CAR) of 11%, both measured against risk-weighted assets. As of mid-April, Kumari Bank and Himalayan Bank’s CCAR had fallen below the regulatory threshold. Meanwhile, Prabhu Bank, Machhapuchchhre Bank, and Citizens Bank are also hovering close to the lower limit.
On average, the sector is still marginally above the requirement, with commercial banks reporting a CCAR of 9.52% and a CAR of 12.35% as of mid-April. These figures, however, show a slight decline from the 9.69% and 12.51% ratios recorded a year earlier.
The weakening capital position is largely attributed to deterioration in loan quality. As economic activity has slowed, loan recovery efforts have faltered, driving up bad loans. The NPL ratio of commercial banks rose to 5.05% in mid-April 2025, up from 4.73% in the same period the previous year. Notably, eight banks now report NPL ratios exceeding 5%.
While lending is under pressure, liquidity in the banking system is steadily rising due to an increase in deposits. NRB reports that the average credit-to-deposit (CD) ratio of commercial banks stood at 78.80% in mid-April, well below the regulatory ceiling of 90%. This suggests that banks theoretically still have over Rs 700 billion in additional lending capacity.
NRB spokesperson Kiran Pandit noted that the combination of weak credit growth and steady deposit inflows has resulted in excess liquidity in the financial system. He added that the central bank is actively managing this surplus through various monetary policy tools.
To ease capital pressure, NRB had previously allowed banks to issue preferential shares. However, in the absence of strong credit demand amid a sluggish economy, most banks have shown little interest in raising additional capital for loan expansion.
