Nepal Rastra Bank Warns of Challenges from Rising Non-Performing Loans and Declining Capital Adequacy

Nepal Rastra Bank (NRB) has highlighted rising non-performing loans (NPLs) and a continuous decline in capital adequacy ratio as major challenges to the financial system. Releasing the Financial Stability Report for FY 2080/81 (2023/24), the central bank noted that while the financial system remains robust, these issues pose significant risks.

According to the report, the NPL ratio of banks reached 3.86% in FY 2080/81 and has crossed 5% by the end of Chaitra 2081 (March 2025). The rise in NPLs has reduced banks’ profits by 7.22%, limiting their net profit to NPR 71.43 billion in the fiscal year.

Globally, economic growth stabilized at 3.2% in 2024, and Nepal’s economy showed signs of recovery. The report states that Nepal’s economy grew by 3.87% in FY 2080/81, driven by expansion in the service sector, agriculture, and energy production.

The consumer price index-based inflation remained at 3.57% in FY 2080/81, slightly above the target but showing a declining trend. Declining non-food inflation has contributed to this improvement. A 16.5% increase in remittance inflows, a positive balance of payments, and rising foreign exchange reserves have strengthened Nepal’s external sector, signaling economic stability.

NRB’s cautious yet flexible monetary policy has maintained liquidity in the financial system. Broad money supply and deposits grew by 13%, while private sector credit expanded by 5.8%. Digital payment systems, including Real Time Gross Settlement, Connect IPS, and PhonePay, have seen increased adoption.

The report notes that banking presence in all local levels has expanded financial access. However, systemic risks persist. “To maintain financial stability, regulatory bodies must ensure vigilant monitoring and proactive measures,” the report emphasizes.