Nepal’s Banking Sector Under Pressure as IMF-Backed Loan Review Reveals Rising Hidden Risks

Nepal’s banking sector is facing growing pressure after a detailed loan portfolio review conducted under the International Monetary Fund’s Extended Credit Facility (ECF) programme revealed that the level of bad loans in major commercial banks is significantly higher than previously reflected in official financial reports. The review, carried out under the supervision of Nepal Rastra Bank, has exposed weaknesses in loan classification, risk management, and regulatory compliance across some of the country’s largest banks.

The assessment covered 10 major commercial banks, including Global IME Bank, Nabil Bank, Nepal Investment Mega Bank, NIC Asia Bank, Himalayan Bank and Prabhu Bank. Based on financial statements up to mid-April 2025, the review found that the average non-performing loan (NPL) ratio of these banks has reached 7.6 percent. In Nepal’s banking system, such a level is considered a serious warning sign because it indicates rising repayment difficulties among borrowers and weakening business conditions in the broader economy.

The findings suggest that the slowdown seen in Nepal’s economy over the past two years is now directly affecting the financial sector. Businesses across construction, real estate, manufacturing, and trading sectors have been struggling with weak demand, declining cash flow, and rising financial obligations. As a result, many borrowers appear unable to repay loans on time, forcing banks to restructure loans or extend repayment periods to avoid immediate default classification.

One of the most concerning observations in the report is the indication of “evergreening” practices inside some banks. This refers to the practice of issuing fresh loans to borrowers so that old loans appear active and performing on paper. While such practices can temporarily improve balance sheets, they often hide the actual financial health of banks and delay the recognition of losses. The report also points to inflated collateral valuations and inadequate provisioning against risky loans, suggesting that some banks may have presented stronger financial positions than the underlying reality.

The review further highlights that several banks continued financing projects despite weak operational progress. In some cases, borrowers reportedly received additional loans simply to repay previous liabilities. Analysts say such trends reflect deeper structural stress in the banking system, where banks are attempting to avoid sharp spikes in bad loans amid slowing credit growth and weak economic activity.

Although the average capital adequacy ratio of the reviewed banks remains at 11.30 percent, sources indicate that some institutions may still face capital pressure if stricter provisioning standards are enforced. Banks such as Himalayan Bank, NIC Asia Bank, Prabhu Bank, Kumari Bank, and Rastriya Banijya Bank are reportedly among those that may require additional capital support depending on the final regulatory assessment.

Despite the concerns, Nepal Rastra Bank has maintained that the banking system is not facing an immediate systemic crisis. However, the central bank has acknowledged that significant improvements are needed in loan monitoring, restructuring practices, governance standards, and regulatory compliance. The regulator has already sought clarification from the concerned banks, and further corrective measures — including additional provisioning requirements or capital enhancement directives — could follow after detailed evaluation.

The report is also being viewed as a critical test of Nepal’s financial transparency under the IMF-supported reform programme. The IMF had made an independent review of major commercial banks a key condition under the ECF arrangement, aiming to assess the true condition of Nepal’s banking system at a time when economic growth remains fragile and investor confidence weak.

Economists say the findings should serve as an early warning rather than a signal of panic. They argue that acknowledging hidden risks and addressing them through stronger supervision and transparent reporting is necessary for long-term financial stability. However, if economic recovery remains slow and business confidence continues to weaken, pressure on banks could intensify further in the coming quarters.