Limited Signs of Improvement, Financial Institutions Under Central Bank Scrutiny Face Worsening Conditions

The financial health of more than a dozen development banks and finance companies under the close watch of Nepal Rastra Bank (NRB) has been found to be deteriorating. According to the central bank’s latest second-quarter study, while some development banks have shown marginal improvement, the condition of finance companies has worsened further.

Following the declaration of Karnali Development Bank as problematic and its takeover on December 25, 2024, the NRB has placed institutions such as Pokhara Finance, Narayani Development Bank, Janaki Finance, Samriddhi Finance, Central Finance, Excel Development Bank, Sindhu Development Bank, and Saptakoshi Development Bank under strict surveillance. The study reveals that Narayani Development Bank’s non-performing loan (NPL) ratio has surged to 47.55 percent, up from 42.53 percent in the first quarter. Similarly, Janaki Finance reported an NPL ratio of 40.89 percent, Pokhara Finance 33.44 percent, Samriddhi Finance 19.30 percent, Gorkhas Finance 14.42 percent, and Reliance Finance 14.31 percent. Central Finance, Nepal Finance, and Saptakoshi Development Bank also recorded double-digit NPL ratios.

Excluding Nepal Share Market, Capital Merchant Banking, and Karnali Development Bank, which are already under NRB control, the situation of other monitored institutions remains alarming. While the NPL ratios of five development banks and three finance companies decreased in the second quarter, those of five finance companies and three development banks increased. The NRB has a policy of declaring institutions failing to maintain the minimum capital adequacy ratio as problematic, giving them six months to improve. Failure to do so could lead to mergers, acquisitions, or license revocation. However, with Governor Mahaprasad Adhikari’s tenure nearing its end, this issue has been put on hold for now.

Experts in the financial sector warn that the high NPL ratios and slow pace of improvement cast uncertainty over the future of these institutions. They argue that only effective measures by the NRB and the priorities of new leadership can resolve this crisis.