Kathmandu: The board of directors of the Nepal Rastra Bank has approved the loan portfolio review reports of 10 large commercial banks. According to sources, the approved reports will now be forwarded to the Bank Supervision Department, which will then issue directives and seek clarifications from the concerned banks.
Sources said the reports had undergone multiple rounds of discussion within the central bank before finally receiving board approval. Based on the irregularities and weaknesses identified in the reports, the regulator is preparing to issue corrective instructions to the banks.
The review was conducted as part of the conditions tied to Nepal’s Extended Credit Facility (ECF) agreement with the International Monetary Fund (IMF). Under the agreement, Nepal was required to conduct an independent review of the loan portfolios of its 10 largest commercial banks through an international audit firm.
Bangladesh-based audit firm Howladar Yunus & Co. carried out the review, and with the report now approved by the central bank’s board, Nepal Rastra Bank is moving toward enforcing corrective measures based on the findings.
“The board has approved the loan portfolio review report,” a Nepal Rastra Bank source told Klikmandu. “Banks will receive the report along with requests for clarification and plans for corrective action regarding the issues highlighted.”
The central bank has indicated that if banks fail to provide satisfactory explanations for the issues identified, further regulatory action could follow. Officials said the review found significant concerns related to loan evergreening, improper loan classification, and questionable valuation practices used during lending decisions. One central bank official said banks may be required to make additional loan-loss provisions if they cannot justify the discrepancies identified in the report.
The review also found that the level of non-performing loans (NPLs) across all banks was higher than officially reported. The assessment was based on financial data up to mid-April 2025 (end of Chaitra 2081 in the Nepali calendar).
At the time, the combined NPL ratio of the 10 banks stood at around 5.5 percent according to published figures. However, the loan portfolio review reportedly found the actual NPL ratio had exceeded 7.7 percent. Sources said three banks had NPL ratios above 10 percent, with two of them nearing 11 percent.
“The report shows NPL ratios ranging from 4 percent to 11 percent among the 10 banks,” a central bank source said. “Three banks have crossed the 10 percent mark, while even the lowest is above 4 percent.”
Because the exercise specifically examined loan portfolios, the report focused heavily on irregular lending practices. According to central bank sources, the review identified widespread loan evergreening — a practice in which banks issue fresh loans to help borrowers repay old or troubled loans and avoid classifying them as bad debt.
The report also found capital adequacy concerns in some banks. Sources said Himalayan Bank and Rastriya Banijya Bank were found to have failed to meet total capital fund requirements.
According to their published financial statements as of mid-April 2025, Himalayan Bank had a capital adequacy ratio of 10.84 percent, while Rastriya Banijya Bank stood at 11.01 percent. Nepal Rastra Bank requires commercial banks to maintain a minimum capital adequacy ratio of 11 percent.
While Himalayan Bank’s own financial disclosures already showed it below the regulatory threshold, the review reportedly found that Rastriya Banijya Bank too had slipped below the required level after adjustments identified during the review.
Central bank sources said the shortfall at both banks was not severe enough to trigger prompt corrective action measures. However, four banks — NIC Asia Bank, Himalayan Bank, Kumari Bank, and Prabhu Bank — were found to have insufficient core capital ratios.
Nepal Rastra Bank has already granted preliminary approval to NIC Asia Bank to issue a 50 percent rights offering to strengthen its capital base. Himalayan Bank, despite issuing a follow-on public offering (FPO), remains below the required core capital threshold in its latest financial statements.
Kumari Bank, meanwhile, has shown improvement in recoveries since the fourth quarter of the previous fiscal year. If the trend continues after the current year’s external audit and regulatory review, pressure on its capital position may ease. Rastriya Banijya Bank has also shown signs of recovery improvement.
The report by Howladar Yunus & Co. highlighted several serious weaknesses in banking practices, including widespread loan evergreening, inflated financial projections submitted by borrowers to secure larger loans, and inconsistent collateral valuation methods that varied from one bank to another.
The review also found that banks had failed to classify non-performing loans in accordance with central bank regulations. Loans overdue beyond prescribed periods were not properly categorized, and banks had not maintained adequate loan-loss provisions based on the duration of delinquency.
According to Nepal Rastra Bank sources, the regulator will send the findings to banks for clarification. After reviewing their responses, the central bank may make adjustments where appropriate and issue further regulatory directives.
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