Nepal’s banking stability faces its biggest test: Rising bad loans
Summary
Nepal's banking sector faces a significant challenge as non-performing loans have more than tripled over five years, signaling rising financial stress despite overall economic growth. Stress tests by Nepal Rastra Bank show potential vulnerabilities in capital adequacy and liquidity under adverse conditions.
Key Points
- The non-performing loan (NPL) ratio in Nepal's banking system increased from 1.48% in 2021 to 4.62% by mid-2025, more than tripling over five years.
- The composition of bad loans shows a shift toward unrecoverable loans, with the 'loss' category rising from 56.66% to 62.30% of total NPLs.
- Sector-wise, fishery, wholesale and retail trade, and construction sectors have the highest NPL ratios, reflecting real economic stress rather than banking mismanagement.
- Stress tests reveal that under moderate economic worsening scenarios, most banks could see NPL ratios above 5% and capital adequacy ratios fall below preferred regulatory comfort zones.
