Kathmandu: The Nepal Rastra Bank (NRB) has issued a stern warning regarding the increasing fragility of the nation’s financial sector, identifying a dangerous cocktail of rising non-performing loans, systemic governance lapses, and the deceptive practice of loan “evergreening.”
In its latest annual supervision report, the central bank’s Bank Supervision Department highlighted that aggressive credit expansion followed by an economic slowdown has pushed bad loans to record highs. This surge in defaults has forced banks to increase their provisioning, which in turn has eroded net profits and placed significant stress on capital adequacy ratios, potentially jeopardizing the stability of the entire banking ecosystem.
One of the most alarming trends identified in the report is the widespread practice of hiding asset quality through artificial loan settlements. Rather than reflecting the true health of their portfolios, many banks are reportedly issuing new credit to distressed borrowers at the end of fiscal quarters specifically to pay off old, maturing debts. This “evergreening” tactic masks the actual risk of default and ensures that loan accounts do not appear as non-performing on official records. The regulator noted that these transactions are rarely based on a borrower’s actual business cash flow, serving only to window-dress financial statements and delay an inevitable reckoning with bad debt.
The central bank also pointed to a chronic failure in post-disbursement monitoring, noting that many institutions ignore the legal requirement to ensure that loans are used for their intended purposes. In several instances, auditors found that funds were transferred to the accounts of company directors or related parties immediately after being released. This lack of oversight is compounded by a breakdown in institutional governance, where the independence of Chief Risk Officers and internal auditors is compromised because their performance is evaluated by the CEOs they are supposed to monitor. Furthermore, bank board meetings are often so cluttered with over a hundred agenda items that critical financial health indicators are frequently overlooked or left entirely undiscussed.
Internal controls are further weakened by a reliance on temporary interns rather than permanent staff within internal audit departments, leading to thousands of unresolved audit findings and a total neglect of mandatory IT and policy audits. On the operational front, the regulator found significant security lapses, such as unauthorized access to vaults and the violation of the “four-eye” principle, where a single individual holds all keys to the treasury. Technological risks remain high as well, with many banks still utilizing outdated software like Windows 7 on ATM booths and failing to maintain the required 90-day CCTV backups in sensitive areas.
Data integrity is another major hurdle for the regulator, as banks frequently submit inconsistent information to the Supervisory Information System. The report cited numerous cases of mismatched borrower names, multiple identification numbers for the same client, and missing permanent account numbers for large-scale loans. These discrepancies make it nearly impossible for the central bank to accurately track single-obligor limits or identify interconnected groups of borrowers.
Finally, the report criticized human resource management, noting that employees in sensitive departments are often not rotated for decades, which significantly increases the risk of internal fraud, while banks continue to ignore the mandatory requirement to spend three percent of their budget on staff training and succession planning.
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