Nepal's Banking Boom vs Rising Bad Loans — What's Really Happening

Nepal's commercial banks just posted some of their strongest profit growth in years. At the same time, the share of loans turning bad has more than quadrupled since 2022, and an even more worrying leading indicator — "watchlist" loans — is climbing faster still. Here's what the actual numbers show, and what they mean for the sector's stability.

NPL Ratio Trend

Nepal's commercial bank non-performing loan (NPL) ratio has climbed sharply over the past four years — from a low of just 1.20% in fiscal year 2021/22 to 5.41% by mid-April 2026, the most recent figure Nepal Rastra Bank (NRB) has published (loan-classification data structurally lags NRB's monthly balance-sheet releases by roughly two months). Some reports place the broader BFI-wide gross NPL figure slightly higher, at 5.6% as of April 2026. Either way, the direction is unambiguous: asset quality has deteriorated steadily and consistently since 2022, which NRB itself has called "the single largest challenge" facing the banking sector today.

The More Worrying Number: Watchlist Loans

A more forward-looking indicator sits one tier below outright non-performance: loans classified under the "watchlist" category — those overdue between 31 and 90 days, but not yet formally non-performing. This figure rose from 6.7% of the total loan portfolio in mid-July 2023 to 11.1% by mid-April 2026. Because watchlist loans are effectively early-stage delinquencies, this trend is a leading indicator suggesting today's headline NPL figures could deteriorate further before they improve, since a meaningful share of these watchlist loans will likely migrate into formal NPL status if borrower conditions don't improve.

Why Net NPLs Remain Low Despite This

Despite the rising gross NPL ratio, net non-performing loans — after subtracting the specific provisions banks have already set aside against expected losses — remain contained at under 1.5%. This is precisely why NRB and most banks can accurately describe the system as fundamentally stable even while gross bad-loan figures climb: banks have been proactively provisioning against expected losses, which cushions the balance-sheet impact even as the underlying loan quality worsens. In absolute rupee terms, total NPLs held by commercial banks reached Rs 220.33 billion in fiscal year 2024/25, a 22.40% jump from Rs 180.01 billion the year before, with private banks driving the bulk of that increase (26.31%) against a comparatively modest 1.48% rise among state-owned banks.

Is Nepal Facing a Banking Crisis?

By itself, a 5.4–5.6% gross NPL ratio is not unusual by regional emerging-market standards, and NRB's Financial Stability Report shows capital adequacy, liquidity, and leverage across the sector all sitting comfortably above regulatory floors. Under NRB's own baseline stress-test scenario, all 20 commercial banks maintained capital adequacy at or above the 11% regulatory threshold, and 15 of the 20 already carried NPL ratios below 5%. However, NRB's stress tests also show real vulnerability under adverse scenarios: if 15% of currently "pass" (performing) loans were downgraded to substandard — a plausible outcome if economic conditions worsened moderately — every one of the 20 commercial banks would see its NPL ratio cross above 5%, and six banks would fall into a capital adequacy band NRB considers below its comfort zone. Push several stress factors together simultaneously, and eight of the 20 banks would fall below the 8.5% capital adequacy threshold. This is not a crisis today, but it is a genuine vulnerability that bears watching.

How This Affects Loan Approval and Interest Rates

Rising NPLs are already making banks more selective and cautious lenders, even while they sit on excess liquidity looking for creditworthy borrowers. Expect more rigorous documentation requirements, closer scrutiny of collateral quality, and greater reluctance to extend credit to sectors or borrower profiles already showing early stress signals. For existing borrowers with a clean repayment record, this environment shouldn't change much; for new or marginal borrowers, expect banks to apply somewhat tighter underwriting standards than they might have during the more expansive lending years of 2021–2022.

What Regulators and Banks Are Doing

NRB has responded with a combination of targeted regulatory forbearance (facilities for loan restructuring and rescheduling to help viable but temporarily stressed borrowers avoid formal default) and closer supervisory monitoring of banks carrying above-average NPL ratios. Individual banks, particularly those with higher NPL exposure such as NIC Asia and Prabhu Bank, have been increasing loan-loss provisioning and tightening internal credit approval processes. NRB's own forecast for fiscal year 2026/27 anticipates money supply growth of 14% and private-sector credit growth of 11% — both a meaningful step up from this year's sluggish pace — but this is explicitly contingent on NPL pressures easing as broader economic activity picks up.

Frequently Asked Questions

What is a non-performing loan (NPL)?

An NPL is a loan on which the borrower has failed to make scheduled principal or interest payments for a specified period (typically 90+ days overdue), at which point banks must classify it as non-performing and set aside additional provisions against potential losses.

Which Nepali bank has the highest NPL ratio?

According to recent NRB data, NIC Asia Bank carried the highest NPL ratio among the 20 commercial banks, at 8.85%, followed closely by Prabhu Bank at 8.84%.

Is my money safe if my bank has a high NPL ratio?

All 20 commercial banks currently maintain capital adequacy at or above NRB's regulatory floor even under stress testing, and deposits are held under the same regulatory protections regardless of a bank's NPL level. That said, comparing NPL ratios across banks is a reasonable factor to weigh when choosing where to hold larger deposits.

What are watchlist loans and why do they matter?

Watchlist loans are those overdue between 31 and 90 days — not yet formally non-performing, but showing early signs of stress. Because a portion of these loans typically migrate into formal NPL status over time, a rising watchlist percentage is considered a leading indicator that headline NPL figures may climb further.