Asset Quality Under Pressure: Development Banks See Marginal Uptick in Non-Performing Loans

Despite ongoing debt recovery efforts across the financial sector, the asset quality of Nepal’s national-level development banks has shown slight deterioration in the first quarter of the current fiscal year. Unaudited first-quarter financial reports reveal a marginal uptick in average non-performing loans (NPL), underscoring the lingering economic pressures that continue to hinder borrowers' repayment capacities.

By the end of Ashoj (mid-October), the average NPL among the eight national-level development banks crept up to 5.81 percent. This marks a 0.07 percentage point increase compared to the 5.74 percent recorded during the corresponding period of the previous fiscal year. While the macroeconomic environment remains challenging, the Q1 financial disclosures illustrate a deeply mixed operational performance. Out of the eight institutions, five witnessed a degradation in their loan portfolios, whereas three successfully managed to trim down their default rates.

Leading the charge in effective credit recovery is Kamana Sewa Bikas Bank, which currently commands the healthiest asset quality among its peers. The institution successfully slashed its NPL by 0.48 percentage points, bringing its bad loan ratio down to a sector-low of 3.93 percent from 4.41 percent a year ago. Lumbini Bikas Bank and Jyoti Bikas Bank also demonstrated strong recovery momentum. Lumbini managed to pull its bad loan ratio down from 7.78 percent to 6.99 percent, securing a 0.79 percentage point improvement. Similarly, Jyoti Bikas Bank shrank its NPL to 7.17 percent from a previous high of 7.97 percent.

Conversely, the remaining five banks faced significant headwinds in managing their credit risks. Mahalaxmi Bikas Bank absorbed the steepest blow to its asset quality. The bank’s NPL surged by a concerning 0.99 percentage points, climbing from 5.50 percent last Ashoj to 6.49 percent this quarter—the highest jump among all national-level development banks. Shangrila Development Bank also reported notable portfolio stress, with its bad loan ratio expanding by 0.78 percentage points to settle at 7.64 percent.

Other institutions reported moderate to slight increases in their distressed loans. Muktinath Bikas Bank saw its NPL widen from 4.03 percent to 4.73 percent over the review period. Meanwhile, Garima Bikas Bank and Shine Resunga Development Bank registered marginal bumps, with their NPLs edging up to 4.81 percent (an increase of 0.08 points) and 4.71 percent (an increase of 0.10 points), respectively.

From an analytical standpoint, the steady transition of active credit into the non-performing category remains a primary headwind for the banking industry. An escalating default rate on principal and interest payments not only drags down quarterly profitability due to mandatory regulatory provisioning but also signals that market liquidity and business turnovers have not yet normalized sufficiently to support timely debt servicing. For investors and regulators alike, these Q1 figures suggest that managing credit risk will remain the central operational challenge for development banks in the coming months.