Non-performing loans (NPLs) in Nepal's construction sector have remained persistently high over the past two years, despite repeated concessions from Nepal Rastra Bank (NRB). The ongoing economic slowdown has severely affected the sector, hindering banks’ ability to recover loans and pushing NPL levels higher.

According to NRB’s Financial Stability Report, the construction sector recorded the highest NPL ratio in Fiscal Year 2023/24 at 7.28 percent. This was followed by the fisheries sector at 6.65 percent, agriculture and metal production at 6.62 percent, and machinery and electrical equipment at 6.09 percent.

The average NPL ratio across banks and financial institutions stood at 3.86 percent in the previous fiscal year. By mid-January in the current FY 2023/24, it had risen to 4.92 percent. As of mid-April 2024, commercial banks reported an average NPL ratio of 4.78 percent. The lingering effects of the COVID-19 pandemic and a sluggish global economy have weakened loan recovery efforts, leading to a further build-up of bad loans.

Despite NRB’s efforts—such as permitting loan restructuring and rescheduling in sectors like construction—there has been little improvement in curbing NPLs.

Through the third quarterly review of its monetary policy for FY 2022/23, NRB had introduced a provision allowing borrowers in sectors that experienced negative growth for two consecutive quarters to apply for loan restructuring, rescheduling, or refinancing. Based on this policy, NRB allowed banks to restructure loans up to Rs 50 million in sectors such as hotels and restaurants, livestock farming, and construction, after assessing the borrower's income and cash flow, provided the request was deemed reasonable.

Construction firms continue to benefit from this facility. Most recently, on April 9, NRB issued a directive allowing banks to restructure or reschedule construction loans tied to projects with assured funding from public bodies—whether already completed or still under way but facing payment delays. However, at least 10 percent of the outstanding interest must be recovered before restructuring, and the revised facility must be executed by mid-July 2025. The loans must retain at least the same classification they held in mid-December 2024. No penalty interest may be charged during the restructuring period, but banks must maintain a 5 percent loan loss provision for such loans.

In its report, NRB acknowledged that the production and construction sectors experienced significant volatility before, during, and after the pandemic. NRB spokesperson Ramu Paudel noted that the construction sector has been among the hardest hit by the economic downturn, which is evident in the rising NPL volumes.

The construction category includes loans for residential (household) and non-residential (commercial) purposes, as well as large-scale infrastructure projects such as highways and bridges. It also covers industries closely tied to construction, including cement, iron rods, bricks, blocks, pipes, and fittings.