By mid-April of the current fiscal year, non-performing loans (NPLs) of nearly half of Nepal’s commercial banks had crossed the 5 percent threshold—a level that banking experts consider unhealthy for the financial system.

According to the unaudited financial reports for the third quarter of Fiscal Year 2024/25, nine out of 20 commercial banks reported NPL ratios exceeding 5 percent.

The rise in NPLs has been attributed to a slowdown in economic activity, which has weakened loan recovery efforts and hindered collateral auctions. Himalayan Bank recorded the highest NPL ratio at 7.68 percent. Compared to mid-April of the previous fiscal year, only three banks have reduced their bad loans, while 17 have reported an increase.

Experts say the lingering effects of the COVID-19 pandemic and the ongoing Russia-Ukraine war have slowed economic activity, reducing borrowers’ capacity to repay loans. Additionally, banks have been unable to auction pledged collateral, leading to a rise in non-banking assets. Former banker Bhuvan Dahal said the growing repayment defaults across banks, cooperatives, and microfinance institutions have further impeded recovery efforts. However, he expects recovery to gradually improve as economic conditions begin to stabilize, which could help lower the volume of bad loans.

As of mid-April, the average NPL ratio among commercial banks reached 4.78 percent, up from 3.65 percent during the same period last year—a rise of 1.12 percentage points.

Amid the worsening loan quality, the International Monetary Fund (IMF) has expressed concerns over the reliability of NPL data reported by Nepali banks. Suspecting that some banks may be engaging in “evergreening”—the practice of issuing new loans to repay existing ones—the IMF had made a detailed review of loan portfolios a condition for disbursing a tranche under the Extended Credit Facility (ECF) last year. In response, Nepal Rastra Bank (NRB) has initiated the process of hiring an international consultant to conduct an independent audit of loan portfolios at major commercial banks.

A recently published IMF report also flagged rising risks in Nepal’s financial sector, pointing out that non-performing assets have not been resolved effectively due to the lack of restructuring and delays in asset auctions.

As per NRB guidelines, loans must be categorized as ‘good’ if they are within the repayment schedule, ‘close monitoring’ if overdue by up to three months, ‘substandard’ if overdue for three to six months, and ‘doubtful’ if overdue for six months to one year.