Kathmandu-Once considered a safe and reliable source of returns for investors, Nepal’s commercial banks have seen their dividend-paying capacity steadily weaken over the past five years.

Data from Nepal Rastra Bank (NRB) shows that average dividend rates have fallen by nearly 50 percent compared to fiscal year 2077/78. The sharp decline has dented investor confidence and raised concerns about the overall health of the banking system.

In fiscal year 2077/78, all 19 commercial banks were profitable and announced an average dividend of 15.84 percent. That year marked the sector’s peak in shareholder returns. However, conditions began tightening soon afterward.

In fiscal year 2078/79, the average dividend slipped to 12.27 percent. Everest Bank led the sector with a 20.68 percent payout, but three banks failed to distribute any dividend.

The downturn deepened further in fiscal year 2079/80, when the average dividend fell to just 7.23 percent. Nine commercial banks paid nothing to shareholders, including Nepal Bank, NMB Bank, Prime Bank, Himalayan Bank, Prabhu Bank, Laxmi Sunrise, Kumari Bank, and Nepal Investment Mega Bank.

The weakest phase came in fiscal year 2080/81, when average dividends dropped to 5.33 percent. Some recovery appeared in fiscal year 2081/82 as 13 banks managed to distribute dividends, lifting the average to 7.45 percent. Still, six banks failed to pay, showing that the sector has yet to fully stabilize.

Capital Expansion Without Matching Growth
Multiple factors are behind this prolonged decline. Policy shifts, market volatility, and structural weaknesses within banks have combined to suppress returns.

The problem dates back to fiscal year 2072/73, when NRB raised the minimum paid-up capital requirement from Rs 2 billion to Rs 8 billion. To meet the new threshold, most banks relied heavily on rights and bonus shares rather than genuine business expansion or mergers.

As a result, capital expanded rapidly while profits did not grow at the same pace. Once paid-up capital crossed Rs 15 billion, generating proportional returns became increasingly difficult, putting pressure on dividend capacity.

Merger Wave and Post-Merger Costs
During Governor Maha Prasad Adhikari’s tenure, NRB encouraged large-scale mergers to strengthen the sector. Incentives were offered as small and mid-sized banks struggled to survive independently.

Fiscal year 2079/80 saw the biggest merger wave in banking history. Ten banks merged. Kumari and NCC became Kumari Bank. Global IME merged with Bank of Kathmandu. Nepal Investment and Mega Bank, Himalayan and Civil Bank, and Laxmi and Sunrise Bank also began joint operations.

While mergers boosted capital and balance sheets, post-merger integration raised costs. Management restructuring, staff adjustments, and system integration weighed heavily on profitability in the short term.

Rising Bad Loans Hit Profits
Rising non-performing loans (NPLs) have added further pressure. A slowdown in real estate, liquidity shortages, and weak economic activity reduced borrowers’ repayment capacity. As a result, bad loan ratios rose sharply.

Nepal Investment Mega, Kumari, Prabhu, Himalayan, Nepal Bank, and NIC Asia Bank have failed to distribute dividends for three consecutive years. Investor confidence in these institutions has suffered.

NRB data shows that high NPLs and capital adequacy pressure are the main reasons behind stalled dividends.

Himalayan Bank, which merged with Civil Bank on Falgun 30, 2079, has not paid dividends since. Its NPL ratio reached 7.28 percent last fiscal year, among the highest in the sector.

Nepal Investment Mega Bank began integrated operations on Magh 26, 2079. It has also failed to distribute dividends, with a bad loan ratio of 5.85 percent. More than 133.7 million public shares are invested in the bank.

Kumari Bank, after merging with NCC Bank in Poush 2079, saw its NPL ratio rise to 6.42 percent last fiscal year. Weak loan recovery has left investors without dividends for three years.

NIC Asia Bank and Nepal Bank face similar pressure. Once leading dividend payers, both have failed to distribute dividends for three consecutive years. Even when profits exist, stricter regulatory requirements have limited payout capacity.

Outlook: Recovery Depends on Loan Quality
Unless banks improve loan recovery and reduce non-performing assets, expectations of strong dividends will remain low.

The banking sector is undergoing consolidation, but capital pressure, rising bad loans, and post-merger challenges continue to weigh on performance. The past five years show that large capital alone does not guarantee returns. What matters more is strong management, efficient operations, and high-quality lending.