Core Capital Ratio at 10%: Are Nepali Banks Well-Capitalized for Future Shocks?

As of Saun End, 2082 (Mid-August 2025), Nepal’s banking sector reports a Core Capital (Tier 1) to Risk-Weighted Assets (RWA) ratio of 10.04%. This ratio, often considered the most important measure of a bank’s resilience, indicates the strength of its permanent capital base that can absorb unexpected losses. Being above the Nepal Rastra Bank’s minimum requirement, the figure suggests compliance. Yet, the question remains: is 10% strong enough for the growing risks in Nepal’s financial system?

From a regulatory compliance perspective, all categories of banks meet the norm. Development banks (Class “B”) lead with 10.65%, followed by finance companies (Class “C”) at 11.27%, while commercial banks (Class “A”) stand slightly lower at 9.97%, just around the threshold. This variation signals that while smaller institutions appear numerically stronger in Tier 1 capital, larger commercial banks—despite their dominance in deposits and credit—are operating with thinner cushions.

The concern is that rising Non-Performing Loans (NPLs), now at 4.62% overall (and as high as 11.05% in finance companies), could quickly eat into core capital. Loan Loss Provisions (LLPs at 5.09%) are already absorbing profits, limiting the ability of banks to organically build capital. Furthermore, with credit exposure expanding to 91.31% of GDP, banks are increasingly vulnerable to shocks from slowing growth, political instability, or external factors such as remittance fluctuations.

In global standards, a 10% Tier 1 ratio is often seen as adequate in normal times but insufficient in periods of systemic stress. Advanced economies usually target significantly higher buffers (12–15%) to ensure resilience. For Nepal, where the economy is highly sensitive to external shocks and domestic risks, the current level may be more of a “minimum survival cushion” rather than a robust shield.

Therefore, while Nepal’s banks are formally well-capitalized under local rules, their ability to withstand future shocks—whether from rising defaults, liquidity pressures, or macroeconomic volatility—depends on proactive strengthening of core capital. Retained earnings, improved governance, and cautious dividend distribution will be crucial to ensure that the 10% ratio does not turn into a vulnerability when tested.