NRB initiates draft legislation for asset management company to address non-performing loans

KATHMANDU: Nepal Rastra Bank (NRB) has begun drafting legislation to establish an Asset Management Company (AMC) aimed at managing non-performing loans and distressed assets of banks and financial institutions. The establishment of such a company has long been debated in Nepal, but questions remain about its feasibility and operational challenges.

Once the legal framework is enacted, the concept of an AMC will gain practical relevance. However, significant concerns persist regarding its future effectiveness. Currently, banks are struggling to recover loans through auctions of collateralized properties, primarily land and real estate. According to NRB data, 64.9% of total loans have been backed by real estate collateral , which remains unsold due to a prolonged slowdown in the property market.

In recent years, sluggish demand in the real estate sector has left banks unable to auction off seized properties. Some banks have even resorted to purchasing these properties themselves when auctions failed. This inability to liquidate distressed assets has led to a sharp rise in non-banking assets held by financial institutions, further straining their balance sheets. Rising non-performing loans (NPLs) not only impact financial statements but also disrupt capital flow and economic cycles.

Challenges with Non-Performing Loans

Currently, banks and financial institutions are unable to recover principal and interest from borrowers on time, resulting in a significant portion of loans becoming inactive. As of the end of Poush in the current fiscal year, inactive loans account for 4.9% of total loans , amounting to approximately NPR 26 billion . Consequently, banks and financial institutions have accumulated around NPR 28 billion in unrealized profits.

The inability to auction distressed assets has caused both the NPL ratio and the volume of idle properties held by banks to increase. To address this issue, discussions are underway to operationalize an Asset Management Company (AMC) . The proposed AMC would purchase non-performing assets, primarily real estate, from banks and gradually sell them to recover funds. Nepal Rastra Bank spokesperson Ramu Paudel confirmed that efforts are underway to draft the necessary legislation.

“We are studying the structures and authorities of similar entities in other countries while drafting the bill,” Paudel told Online Khabar . The concept was also included in the monetary policy for the fiscal year 2081/82. “To manage inactive assets and non-banking properties of banks and financial institutions, a draft of the Asset Management Act will be prepared and submitted to the government,” the policy states.

Operational Challenges for the AMC

However, establishing and operating such a company poses significant challenges. Primarily, the AMC would require substantial capital to purchase distressed assets from banks. Questions remain about who would fund the AMC and how ownership would be structured.

“Banks have been unable to sell properties through auctions, so the AMC must purchase all such assets. But raising such large amounts of capital is a challenge,” said Dr. Gunakar Bhatta, head of NRB’s Financial Research Department. “Who will take the lead in mobilizing such resources? That remains a major question.”

If the AMC fails to sell purchased properties in the future, it risks incurring losses or reducing banks’ recovery rates. Alternatively, the AMC could lease out properties to generate income, with rental income and eventual sales forming the primary revenue streams.

Ownership Structure and Governance

Nepal Bankers Association President Santosh Koirla suggests that the AMC should operate under joint ownership between the government and financial institutions. He proposes a public-private partnership (PPP) model for its operation.

“Currently, local governments often delay issuing recommendations for property transactions, among other procedural hurdles. The AMC must be granted special authority to bypass such delays,” Koirla emphasized. He added that the AMC should have the autonomy to evaluate and purchase distressed assets directly from banks, ensuring faster recovery of loans.

Former banker Parshuram Kunwar Kshetri stresses the need for clarity in policies governing the AMC’s operations, including its rights, operational modalities, tenure, and business processes. These issues should be addressed through laws, regulations, or guidelines. Kshetri advocates for full government ownership of the AMC to prevent conflicts of interest.

“Granting ownership to banks or private entities could lead to favoritism when purchasing distressed assets,” he warned. “If the AMC purchases properties at discounted rates but faces interference, banks may not receive fair compensation, undermining the entire process.”

Instead, Kshetri suggests that a government-owned AMC could issue bonds to banks to raise funds. “The AMC could purchase assets and issue bonds to banks in return. If these bonds are counted toward statutory liquidity ratios (SLR), it would benefit banks. Government-backed bonds would also enhance security,” he explained.

Broader Mandate for the AMC

Beyond managing distressed assets, the AMC could also oversee government-owned properties. “A special law should be enacted to establish the AMC, granting it authority to manage government lands as well,” Kshetri suggested. “The same entity could decide whether to lease or retain government properties, streamlining management.”

In some countries, AMCs have been granted immunity from judicial or regulatory interference, ensuring smooth operations. Experts warn that if Nepal’s AMC lacks sufficient authority, it risks failure. While banks currently have the power to recover loans, procedural complexities have hindered effective implementation.

Lessons from Loan Recovery Tribunals

In the past, Nepal established loan recovery tribunals to expedite loan recovery. However, these tribunals were neither granted adequate authority nor able to function effectively. Experts believe that a well-structured AMC could fill this gap.

Proposed Operational Framework

Experts suggest that the AMC should adopt a transparent payment mechanism. For instance, it could pay a fixed amount upfront and settle the remaining balance after selling the property. This approach would align interests between the AMC and banks.

Dr. Gopal Bhatta, former executive director of Nepal Rastra Bank, emphasizes the need for an AMC due to the rising volume of idle assets and liquidity challenges faced by banks. He advocates for joint ownership between the government and financial institutions but insists on an independent management committee to prevent conflicts of interest.

“The law should clearly separate shareholders from the management team to ensure transparency,” Bhatta said. “Even if banks invest in the AMC, they should not interfere in its operations.”

Given the limited appeal for private sector participation, Bhatta suggests that ownership could include the government, banks, financial institutions, and various funds. He warns that private sector involvement might prioritize profit over recovery, complicating the AMC’s mandate.

Capital Requirements and Governance Concerns

Former banker Bhuvan Kumar Dahal highlights the need for further study and debate on the AMC’s ownership structure. “The AMC would require at least NPR 10 billion in capital. Mobilizing such funds is a significant challenge,” he noted.

If the government owns the AMC, there is a risk that decision-making could be delayed due to bureaucratic fears of accountability or legal challenges. “Many government entities already face delays in decision-making due to fear of litigation. If the AMC encounters similar issues, its operations will suffer,” Dahal warned.

Legal Protections for the AMC

To ensure the AMC’s success, experts recommend granting it sufficient authority to make decisions without facing legal or regulatory hurdles. Without such protections, the AMC could become paralyzed, failing to fulfill its mandate. Therefore, Nepal Rastra Bank is working to draft a robust legal framework that empowers the AMC to operate effectively.