Large Commercial Banks May Need Additional Loan-Loss Provisioning after Portfolio Review

Large commercial banks may need to set aside additional provisions for credit risk after a loan portfolio review found weaknesses in loan classification and provisioning practices, according to Nepal Rastra Bank (NRB).

Bangladeshi consulting firm Howladar Yunus & Co conducted the loan portfolio review of 10 large commercial banks and found that some banks had not classified loans and maintained provisions in line with NRB directives. As a result, banks may be required to make additional provisioning.

“We have sought explanations from the concerned banks based on the observations in the report,” an NRB executive director said. “If they fail to confirm that loan classification and provisioning were done as per the rules, we will require them to set aside additional provisions.”

According to sources, the average non-performing loan (NPL) ratio of the reviewed banks stands at 7.70 percent, with individual banks recording NPL ratios ranging from 4 percent to 11 percent. Two banks have NPL ratios above 10 percent.

The reviewed banks include Global IME Bank, Nabil Bank, Nepal Investment Mega Bank, Rastriya Banijya Bank, Kumari Bank, Laxmi Sunrise Bank, Prabhu Bank, Himalayan Bank, NMB Bank and NIC Asia Bank. Based on unaudited financial statements up to mid-January of the current fiscal year (FY 2025/26), the average NPL ratio of these banks is 6.18 percent, with Himalayan, Prabhu, Nepal Investment Mega and NIC Asia recording ratios above 7 percent. However, the portfolio review was conducted using financial data up to mid-April of the previous fiscal year (FY 2024/25).

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.

Banks must provision 1 percent for good loans, 5 percent for watchlist loans, 25 percent for substandard loans, 50 percent for doubtful loans and 100 percent for bad loans.

The portfolio review also noted that banks had extended additional loans to large projects to maintain their classification as good loans, raising concerns about “evergreening” of loans. In some cases, projects lacked physical progress despite increasing loan exposure, and banks were found to have insufficient evidence of site inspections and project progress.

NRB officials said further action would be taken after banks submit their explanations. “After banks present their views, we will decide on bank-specific directives and possible policy-level changes,” the executive director said.

The review assessed banks based on loan policies and procedures, loan classification, collateral valuation, provisioning practices and regulatory compliance. The consultant conducted a detailed assessment of loan files, core banking systems, project investments and repayment status.

NRB signed an agreement with Howladar Yunus & Co on August 28, 2025, requiring the firm to submit the report within five months. NRB spokesperson Guru Prasad Paudel said the review was a routine exercise conducted by a third-party foreign consultant and that no major systemic risks were identified.

“This is a routine exercise conducted by a foreign third party. We have not seen issues that could significantly change the credit landscape or affect the banking system,” Paudel said, adding that the central bank will prepare a roadmap to address the identified weaknesses.

The loan portfolio review was conducted as a prior condition set by the International Monetary Fund (IMF) before extending the Extended Credit Facility to Nepal. Accordingly, NRB selected an international consulting firm through a bidding process to carry out the review.