Kathmandu: Nepal Rastra Bank (NRB), the central bank, has raised serious concerns over dozens of irregularities discovered within commercial banks, particularly regarding loan valuation and classification. According to the central bank’s annual Bank Supervision Report, inspections revealed several systemic malpractices, including the misuse of ‘drawing power,’ lending to companies with negative net worth, and providing margin loans to financial institutions where non-performing loans exceed five percent.
The report highlights significant lapses in internal governance, financial discipline, and operational security. During on-site inspections conducted for the fiscal year 2081/82 (2024/25), the NRB identified major policy deviations and hazardous banking practices. These systemic weaknesses in internal control mechanisms not only jeopardize depositors’ funds but also pose a significant threat to the overall stability of the national financial system.
A particularly troubling finding is the direct interference of management in internal audit processes. The report notes that Internal Audit Departments, which are tasked with flagging irregularities, are often functioning under immense management pressure. In many instances, Chief Executive Officers (CEOs) are responsible for the performance evaluations of internal audit heads, and business expansion targets are even included in these evaluations, severely compromising the independence and impartiality of the audit.
Furthermore, the presence of Board Chairpersons as invitees in audit committee meetings has further weakened independent oversight. The central bank also noted that the effectiveness of these departments has declined because banks are relying on interns and temporary staff instead of hiring skilled professionals.
The most critical discrepancies were found in credit disbursement and loan classification. The central bank observed a widespread practice of ‘evergreening,’ where banks provide additional loans or increase overdraft limits to borrowers unable to pay interest and principal, effectively settling old debts with new ones. Banks have also been caught concealing bad loans by failing to classify them as ‘loss’ even after the auction process has begun.
Additionally, loans are being issued without assessing a borrower’s actual repayment capacity, and large borrowers are often granted loans at base rates without any risk premium, which threatens bank profitability and capital adequacy. The NRB also pointed out a total lack of monitoring regarding the actual end-use of disbursed funds.
On the risk management side, the Asset-Liability Committees (ALCO) of several banks appear to be functioning merely as a formality. Decisions regarding interest rates are often made solely to satisfy regulatory ratios rather than being based on actual market analysis. The report criticizes the weak ‘Contingency Funding Plans,’ noting that they fail to address modern risks such as pandemics, political instability, or the impact of negative social media campaigns.
In treasury operations, a lack of coordination between the front, middle, and back offices has increased risks in foreign exchange and investment. Furthermore, banks are reportedly trading in the stock market haphazardly without proper risk-return analysis or ‘stop loss’ policies to mitigate potential losses.
Operational security remains a significant concern, with reports of unauthorized access to bank vaults by cleaning staff, interns, and messengers. The inspections found instances of extreme negligence, such as transporting cash via motorcycles without security guards. Cybersecurity is also at risk due to the use of shared usernames and passwords, granting interns access to critical systems, and failing to maintain secure audit trails for transactions.
The report identifies further administrative failures, such as storing unissued ATM cards and their confidential PINs together in the same room for over a year. Despite regulations requiring dual control over chequebooks and ATM cards, some banks have left these responsibilities to a single individual. These manual errors and the lack of oversight have heightened the risk of internal fraud and theft. Consequently, the Rastra Bank has issued strict directives to all commercial banks to immediately rectify these shortcomings and uphold financial discipline.
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