Nepal’s banking sector faces crisis as bad loans surge, CEOs struggle with debt recovery

KATHMANDU – Chief Executive Officers (CEOs) of Nepal’s commercial banks are increasingly troubled by the rising burden of bad loans. Just a few years ago, bankers were confident in collateral-backed lending, but with collateral auctions failing to yield results, they now face mounting pressure from all sides. As the economic slowdown continues to impact businesses, banks are struggling with loan recovery while also facing pressure to expand credit.

The Nepal Rastra Bank (NRB) set a target of 12% credit expansion for the current fiscal year, but as of the first six months, credit expansion has only reached 5%. Santosh Koirala, President of the Nepal Bankers’ Association, has identified loan recovery as the biggest challenge for banks. Speaking at an interaction program organized by the Economic Media Society Nepal, he emphasized that there is no alternative to effective loan recovery. Despite liquidity levels increasing in banks, instead of aggressively expanding loans to new customers, bankers are focusing their full strength on recovering outstanding loans. As tensions between banks and borrowers escalate, the NRB has stepped in to mediate.

Nepal Rastra Bank Governor Maha Prasad Adhikari has stated that the responsibility of banks extends beyond merely providing loans. He stressed that banks must also support businesses in times of crisis, particularly when the economy is struggling. The NRB is working on legal amendments to prevent genuine borrowers from being blacklisted too easily, ensuring that honest entrepreneurs do not face undue penalties that could harm their businesses. The central bank is revising blacklisting regulations, as current practices of blacklisting borrowers for minor financial difficulties have created a negative impact on the country’s business environment.

Governor Adhikari emphasized that the monetary policy framework is being utilized to address banking sector issues, particularly in loan recovery. The NRB has formed a task force to draft new regulations aimed at improving loan recovery mechanisms. Once finalized, bad loans will be categorized separately, making it easier for banks to manage them. While full recovery may not be possible, the central bank is drafting laws for the establishment of an Asset Management Company (AMC) to handle distressed loans. Governor Adhikari linked the issue of loan recovery to the slow economic growth, stating that as the economy improves, loan recovery will also become more effective.

Addressing concerns about blacklisting, Governor Adhikari highlighted that technical shortcomings should not lead to borrowers being blacklisted. He explained that a businessman with decades of experience could face financial setbacks due to technical reasons, but immediate blacklisting would only lead to further disruptions. Many such entrepreneurs have taken loans and operated successfully for years, but a minor financial planning flaw could force them out of business. In such cases, bankers play a crucial role beyond just lending; they must also offer financial counseling. If banks provide advisory support, struggling borrowers can be prevented from going bankrupt, ultimately benefiting the economy as well.

According to NRB sources, the upcoming second-quarter review will introduce modifications to the Credit Information Center’s blacklisting rules. However, the central bank has clarified that these changes will only benefit genuine borrowers and will not protect deliberate defaulters.

Currently, banks and financial institutions blacklist borrowers through the Credit Information Center (CIC) based on their loan repayment history. Under the existing rules, borrowers who have taken loans of NPR 1 million or more and fail to repay within the specified period can face legal proceedings and blacklisting as per the Banking Offense and Punishment Act.

A borrower may be blacklisted under the following conditions:

• Failure to repay principal or interest for over one year.
• Absconding or remaining out of contact for 90 days or more.
• When a licensed institution files a complaint with the Debt Recovery Tribunal.
• Failure to provide additional collateral or personal guarantees upon request after loan maturity.
• Knowingly providing false information regarding collateral or business status.
• Tampering with loan-related collateral.
• Bankruptcy declaration as per prevailing laws.
• When a licensed institution files a lawsuit against the borrower.

As per the Banking and Financial Institutions Act, 2016 (BAFIA), financial institutions must provide at least 35 days’ prior notice before blacklisting a borrower. Section 57(11) of the Act states that if a borrower fails to clear loans and interest within the agreed timeframe, the bank must report them to the Credit Information Center for blacklisting.

The rising burden of bad loans is also linked to Nepal’s sluggish economic recovery. Many businesses continue to face challenges in sustaining operations, leading to loan defaults. As banks in Nepal tighten their lending policies, it has become difficult for entrepreneurs and businesses to access credit. The financial sector is now under pressure to maintain a balance between loan recovery and providing necessary support to borrowers.

The Nepal banking sector is also witnessing a shift in regulatory focus, with policymakers aiming to introduce mechanisms that ensure financial stability without disrupting businesses. Commercial banks in Nepal are working closely with regulators to ensure that new policies address both recovery concerns and the need for sustained credit flow in the economy.

With upcoming legal amendments and policy changes, the NRB aims to strike a balance between protecting genuine borrowers and ensuring effective loan recovery mechanisms for financial institutions in Nepal. The role of commercial banks, financial institutions, and policymakers will be crucial in determining how the country’s banking sector navigates these challenges. The evolving financial landscape demands that Nepal’s commercial banks and financial regulators take a proactive approach to mitigate risks associated with bad loans while fostering a more resilient business environment.

As Nepal’s banking industry adapts to these regulatory changes, businesses and entrepreneurs must also focus on financial discipline to avoid falling into the cycle of loan defaults. In the coming months, the success of Nepal’s financial sector will depend on how well commercial banks manage loan recovery, regulatory compliance, and economic support for businesses. With economic reforms on the horizon, stakeholders in Nepal’s financial sector must work collaboratively to create a more stable and growth-oriented banking environment.