Kathmandu: In its monetary policy for the current fiscal year, Nepal Rastra Bank (NRB) explicitly pledged to review and revise the existing loan classification and loss provisioning framework.
However, with barely a month remaining before the fiscal year concludes, this commitment remains unfulfilled. While the central bank has already begun soliciting suggestions for the upcoming fiscal year 2026/27 monetary policy, the regulatory adjustments promised nearly a year ago have yet to be implemented, leaving the banking industry in a state of uncertainty.
The delay appears to be rooted in bureaucratic inertia and leadership transitions within the central bank. The NRB’s Regulation Department had concluded an internal study and submitted a report with specific recommendations to the then-Deputy Governor, Dr Neelam Dhungana Timsina, during the second quarter of the year.
Sources indicate that the report sat on her desk for two months without being discussed or advanced to the management committee until she completed her tenure and retired in late February. Even after Kiran Pandit was appointed as the new Deputy Governor, the report has failed to gain traction, and the status quo on provisioning remains unchanged.
On Monday, a delegation from the Nepal Bankers’ Association, alongside representatives from the Development Bankers Association and the Finance Company Association, met with Deputy Governor Pandit to push for the implementation of the study’s findings.
However, the bankers left the meeting without a positive commitment. Pandit reportedly expressed scepticism, questioning whether easing provisioning requirements is wise at a time when the banking sector is facing heightened risks and deteriorating credit quality. He cited the example of more conservative banks to argue that if risk analysis and cash flow monitoring are handled correctly at the time of lending, the current classification rules should not pose an undue burden.
The internal study, led by Director Devendra Gautam, had recommended a more nuanced, sectoral approach to loan classification, moving away from the current “one-size-fits-all” model. Drawing on practices from India and Bangladesh, the report suggested that the timeline for classifying a loan as “loss”—which currently requires 100 percent provisioning after being overdue for one year—could be extended to 18 or 24 months for specific industries. The proposal emphasized redefining priority sectors to include high-potential areas like Information Technology (IT) and Tourism, providing them with more flexible regulatory treatment to prevent them from being prematurely labelled as non-performing assets.
The report specifically advocated for distinguishing between different types of businesses within a sector. For instance, it suggested that IT service exporters should be treated differently from hardware importers, and that manufacturing units utilizing local raw materials deserve more leniency than trading firms. By redefining Micro, Small, and Medium Enterprises (MSMEs) and priority lending categories, the central bank could allow certain productive sectors more breathing room before forcing banks to set aside massive capital reserves against potential losses.
Currently, the regulatory environment is quite rigid: loans are classified as “Good” (1 percent provisioning), “Watchlist” (5 percent for 1-3 months overdue), “Substandard” (25 percent for 3-6 months overdue), “Doubtful” (50 percent for 6-12 months overdue), and “Loss” (100 percent for over a year overdue).
Bankers argue that with the adoption of Expected Credit Loss (ECL) guidelines, these ageing-based provisions have become redundant or excessively harsh. As the deadline for meeting aggressive lending targets in agriculture, energy, and MSMEs by 2028 approaches, the industry maintains that a failure to modernize these classification rules will continue to stifle credit flow and hamper economic recovery.
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