Non-Performing Loans of Banks Rise Marginally in Second Quarter

Banks have reported a rise in non-performing loans (NPLs) in the second quarter of the current fiscal year (mid-July 2025 to mid-January 2026), amid sluggish economic activity and difficulties in loan recovery.

According to unaudited financial statements published by banks up to mid-January, the average NPL ratio of commercial banks has increased to 5.07 percent. The ratio stood at 4.48 percent during the same period of the previous fiscal year, marking an increase of 0.59 percentage points.

Compared to mid-January of last fiscal year, NPLs of 12 commercial banks increased, while eight banks managed to reduce them. Of the total, nine banks have NPL ratios exceeding five percent. Everest Bank reported the lowest NPL ratio at 0.68 percent, while Himalayan Bank recorded the highest at 7.96 percent.

Nepal Bankers’ Association President Santosh Koirala attributed the rise in bad loans to weak economic activity, the Gen Z movement in early September, and a growing tendency among borrowers to delay loan repayment. He said these factors have affected both credit expansion and recovery, with the impact reflected in banks’ financial statements.

“The country’s situation remains unstable. New lending as well as recovery of principal and interest on existing loans has been slow,” Koirala said, adding that some banks, however, have shown improvement in loan recovery. He noted that loan recovery improved in the second quarter compared to the first, and credit expansion has also begun to pick up pace gradually.

The average NPL ratio of commercial banks stood at 4.44 percent in mid-July 2025. It rose to 4.86 percent by mid-October and crossed the five percent mark by mid-January.

The International Monetary Fund (IMF) has repeatedly raised concerns over the reported NPL figures of Nepali banks, citing possible loan evergreening practices. As a condition for disbursing instalments under the Extended Credit Facility (ECF), the IMF has demanded a loan portfolio review of 10 major commercial banks.

In line with this requirement, Bangladeshi consulting firm Howladar Yunus & Co has completed an audit of the loan quality of major commercial banks. However, the audit report has yet to be submitted to Nepal Rastra Bank.

Under NRB’s loan classification directives, loans are categorized as good if payments are up to date or overdue for less than three months, watchlist for those overdue up to three months, substandard for delays between three to six months, doubtful for six months to one year, and bad for defaults exceeding one year. Loans under the “good” and “watchlist” categories are considered performing, while rescheduled, restructured, substandard, doubtful, and bad loans fall under non-performing or inactive classifications.