The non-banking assets (NBAs) of banks and financial institutions (BFIs) in Nepal have surged by nearly 72% over the past year, driven by a sharp rise in non-performing loans (NPLs). According to recent data from Nepal Rastra Bank (NRB), the total NBAs of Nepali BFIs reached Rs 40.75 billion in mid-January 2025, up from Rs 23.71 billion in mid-January 2024. This means BFIs accumulated Rs 17.44 billion worth of such assets over the year. Commercial banks, which hold the largest share of the banking sector, saw their NBAs jump by 75.41%, rising from Rs 19.88 billion to Rs 34.87 billion. Development banks and finance companies also recorded significant increases, with their NBAs climbing by 43.11% to Rs 3.60 billion and 73.6% to Rs 2.29 billion, respectively.
This rapid accumulation of NBAs highlights the growing challenges that BFIs are facing in recovering bad loans and managing distressed assets. Bankers warn that if left unaddressed, this could further strain financial institutions, limiting their ability to extend fresh credit and support economic growth.
Experts warn that without effective intervention—such as the establishment of an Asset Management Company (AMC) or a "bad bank"—the rising burden of NBAs could weaken the overall stability of Nepal’s financial sector. That is why the calls for asset management company (AMC) have grown louder in recent months. Banks and financial institutions foreclose on unsecured loans if they fail to sell them through auctions. The assets acquired through foreclosure are classified as non-banking assets (NBAs). Once a bank forecloses such assets, it must allocate 100% of the loan loss provision to mitigate risk. This requirement has led to a significant increase in banks' loan loss provisions.
The sluggish economic environment, coupled with limited lending opportunities and difficulties in auctioning collateral, has exacerbated the problem for banks. Despite repeated public notices for collateral auctions, banks have struggled to attract buyers. Non-banking assets are rising due to the current economic environment. Local authorities have also failed to provide adequate support, making it increasingly challenging to sell these assets.
A similar issue arose in 2012 when some banks and financial institutions faced difficulties in managing their non-banking assets. At that time, discussions about establishing an asset management company gained traction, but no concrete steps were taken.
NRB finally drafting bill
The central bank, through its monetary policy for the fiscal year 2024/25, announced plans to form an asset management company (AMC). In line with this, Nepal Rastra Bank (NRB) has begun drafting a law which is expected to be ready within the fiscal year.
According to NRB Spokesperson Ramu Paudel, the drafting process is currently underway. “A separate law is required for this. The central bank is working on the necessary legislation to establish the company and also conducting needful studies for its implementation,” Paudel added. Recognizing the risks posed by rising non-banking assets, the High-Level Economic Reforms Committee, led by former finance secretary Rameshore Khanal, has recommended establishing a ‘bad bank’ to manage distressed assets. The committee proposed creating this specialized financial institution through a public-private partnership, which would require separate legislation. In the early 2000s, when Rastriya Banijya Bank and Nepal Bank were on the verge of collapse due to rising non-banking assets, the central bank drafted a proposal to establish a bad bank. The draft was submitted to the Ministry of Finance but saw no further progress.
According to Bhuvan Dahal, former president of the Nepal Bankers’ Association, banks will no longer have to manage non-banking assets and can focus entirely on their core banking activities once the asset management company is established. “However, given Nepal’s current situation, a large, capital-intensive asset management company is needed to resolve the crisis,” he said.
While the creation of a bad bank is seen as a critical step, experts say that such an institution must be a large, capital-intensive entity capable of absorbing systemic shocks. Bankers argue that its success will depend on several key factors, including autonomy, transparency, and the ability to operate free from political interference.
“A bad bank is designed to take over non-performing assets from financial institutions, allowing them to clean up their balance sheets and refocus on fresh lending. For such an institution to function effectively, it must be independent, well-capitalized and shielded from external pressures. Political influence must be completely eliminated to ensure the bad bank operates professionally and without bias,” financial expert Keshav Acharya said. “If political interference infiltrates its operations, the core objective of restoring financial stability will be lost.”
Acharya says that if the bad bank is lenient in asset recovery or succumbs to external influences, the entire concept will fail. Its primary purpose is to recover toxic assets, not to serve as a shelter for defaulters. Therefore, the institution must enforce strict governance mechanisms to ensure every transaction is conducted with the highest level of integrity,” he added. One of the key challenges in establishing a bad bank is ensuring the legally sound sale of distressed assets. Buyers must be protected from future legal complications. To facilitate this, a clear and robust legal framework must be established in advance. Without this, the effectiveness of a bad bank could be significantly undermined.
Moreover, the sluggish real estate market poses a significant hurdle. “Investor confidence is currently low, and demand for real estate and other assets remains weak. Unless economic conditions improve, the effectiveness of a bad bank could be limited,” said Everest Bank CEO Sudesh Khaling. “If the current situation with bad assets persists, Nepal will, undoubtedly, need an asset management company. However, if conditions improve, banks may be able to manage these assets themselves,” he said. “As of now, the recession continues, the government has yet to settle dues with contractors and capital expenditure remains slow. Addressing these issues could gradually stabilize the situation.”
According to former banker Bhuvan Dahal, the biggest question is who will invest in such a capital-intensive entity. “If investors come forward, it would be a positive step, as banks would no longer need to worry about bad loans or distressed assets. They could instead focus on core banking activities and reinvest freely,” he added.
Focus on loan recovery
The rising burden of NBAs has forced banks to prioritize loan recovery over their core banking activities. This shift has led to a slowdown in credit disbursement, further straining the economy.
Commercial banks reported a 4.62% drop in net profit during the first half of the current fiscal year, with net profit to Rs 27.43 billion from Rs 28.76 billion in the previous year. This decline is largely due to an increase in non-performing loans (NPLs) and higher loan loss provisions. NPLs have gone up by 1.09 percentage points, reaching 4.49% in the first half of this fiscal year, up from 3.40% last year. This indicates a notable deterioration in asset quality. Consequently, banks have allocated Rs 24.67 billion for loan loss provisions which is nearly equivalent to their total net profit . This growing financial burden is limiting their ability to invest in expansion and growth initiatives.
Khaling expressed concern over these figures, attributing the challenges to past lending strategies. “During and around the COVID-19 period, banks engaged in aggressive lending without properly assessing cash flow. That was a mistake,” said Khaling. The lenient credit policies of that time have resulted in a surge in bad loans, compelling banks to set aside significant provisions, further straining their profitability, he added.
A senior banker revealed that one bank has hired a third-party consultant to take control of struggling businesses that are unable to meet their debt obligations. While the central bank prohibits financial institutions from directly managing businesses, banks have found a regulatory loophole by appointing external consultants. A commercial bank CEO commented that the situation was deeply concerning. “Since liquidating assets is often insufficient to cover outstanding debts, banks are under immense pressure to operate these firms through third-party entities,” he added.
Acharya said these developments signal that the banking system is in a critical state, and added that the central bank must take urgent action.
Cleaning Up the Balance Sheet
Establishing a bad bank could play a vital role in cleaning up the balance sheets of banks, enabling them to focus on their core activities like lending and financial services. “By transferring bad loans to a separate entity, banks can reduce provisioning requirements, improve liquidity and restore investor confidence,” said Acharya. “When banks offload their non-banking assets to a bad bank, their balance sheets become healthier, reducing the burden of loan provisioning. This strengthens their financial position, allowing them to generate higher profits and good returns for their shareholders.”
With NBAs now totaling Rs 40 billion, exceeding the combined paid-up capital of all 16 development banks and five times that of finance companies, the need for action is clear. “These numbers are substantial. Since our economy’s drivers are not moving at a rapid pace, we need to establish an asset management company as soon as possible,” concluded Acharya.
(This news report was originally published in March 2025 issue of New Business Age Magazine.)
