Nepal Bad Loans Crisis Report: Banks Demand Government Support for NPL Management
23rd May 2025, Kathmandu
Banks and financial institutions in Nepal are facing growing problems with bad loans. To address this, they have formally asked the government for support.
Nepal Bad Loans Crisis Report
The request focuses on legal, administrative, and physical help in managing non-performing loans (NPLs) and streamlining the loan recovery process.
Banks Call for Specialized Asset Management
During a discussion on proposed amendments to the Bank and Financial Institutions Act (BAFIA) at the Finance Committee of Parliament, the Nepal Bankers’ Association (NBA) raised strong concerns. The NBA recommended forming a separate asset management company. They said such a company would handle bad loans more efficiently. However, they stressed that the government’s active involvement is necessary to make it successful.
Banks argue that despite their best efforts, they cannot recover defaulted loans without structural support. Auctions of seized assets often face delays due to legal and procedural hurdles. This slows down the recovery process and adds financial pressure on banks.
Loans in Risky Areas Led to Trouble
Nepali banks often invest in high-risk sectors. These sectors promise high returns, which makes them attractive. However, many of these investments did not deliver. Growing economic instability, business failures, and tough market conditions stopped expected returns. This has resulted in more loans turning into NPLs.
Banks now hold a large number of non-performing assets. This weakens their financial stability. It also limits their ability to give out new loans. Meanwhile, the lengthy auction process for recovering these loans is not working well.
Banks Seek Government Intervention
To fix the issue, banks have asked for strong government action. They want better legal tools, clearer procedures, and faster processes for auctioning defaulted assets. They believe that forming a public-private asset management company would help. This company would take over bad loans and work to recover them in an organized manner.
Without such measures, bank officials warn that the bad loan problem could get worse. It could weaken public trust in banks and hurt the economy further. They say this is not just a banking issue, but a national economic concern.
Nepal Rastra Bank Has Not Yet Delivered
Earlier, the Nepal Rastra Bank (NRB) promised to help with this issue. In its Monetary Policy for Fiscal Year 2081/82, NRB said it would propose a new law to allow non-banking entities to manage bad assets. However, no draft has been shared yet. Bankers and economists are frustrated with the delay.
Many experts believe this law is urgent. Without it, there is no legal basis to create a bad loan management company. This legal gap continues to slow progress.
Expert Panel Recommended a ‘Bad Bank’
The Economic Reform Recommendation Commission, led by former finance secretary Rameshore Khanal, also looked into the issue. They advised forming a ‘bad bank’ under a public-private partnership (PPP) model. This bank would take over bad assets and work to recover them over time.
Their report noted that bad loans are growing fast. Without a clear policy, the issue may spiral out of control. However, the government has not moved forward with the idea.
Government Promises Support in Policy Plan
In its policy plan for the upcoming fiscal year, the government has promised to help banks manage bad loans. However, the support remains vague. Bankers say they need real action, not just words. They are waiting for new laws, specific programs, and active cooperation.
Until that happens, banks will continue to struggle. Their bad loans are growing. Their profits are shrinking. Their ability to support the economy through fresh loans is limited.
Uncertainty Hurts the Economy
As bad loans increase, banks become more cautious. They tighten lending. Businesses find it harder to get credit. Economic growth slows down. The problem affects everyone, not just banks.
Uncertainty in the business environment and unstable economic conditions add to the problem. Borrowers find it hard to repay loans. This feeds into the cycle of rising NPLs.
Urgent Need for Action
The banking sector needs urgent help. Banks are ready to work with the government. But they need a clear plan, effective laws, and fast decisions. Experts say now is the time for bold reforms.
If handled well, the bad loan crisis can be turned into an opportunity. A proper asset management company can restore stability. Strong legal support can boost bank confidence. And timely reforms can protect the broader economy.
The call for support is growing louder. It is up to the government to act — and act quickly.
For more: Nepal Bad Loans Crisis Report
