Kathmandu -Nepal Rastra Bank is preparing Nepal Rastra Bank to announce completion of loan review of 10 major banks under IMF condition to announce the completion of an independent loan portfolio review of 10 major commercial banks, as committed to the International Monetary Fund (IMF).

The NRB Board has approved the report and is preparing to issue corrective directives to the concerned banks.

The review, conducted by Bangladesh based consultancy firm Howladar Yunus & Co., found that five commercial banks may require additional capital. Himalayan Bank, NIC Asia Bank, Prabhu Bank, Kumari Bank and Rastriya Banijya Bank were identified as banks that may need capital enhancement.

However, Kumari Bank and Rastriya Banijya Bank have already taken corrective measures in the current fiscal year, and their financial positions may be reassessed before a final decision is made.

The review showed that the average non performing loan ratio of the 10 banks reached 7.7 percent, up from the previously reported 5.5 percent. The independent assessment found that actual credit risk in the banking sector is higher than earlier estimated.

According to the report, NPL ratios ranged from 4 percent to 11 percent. Sources at Nepal Rastra Bank said the bad loan ratios of Himalayan Bank, Prabhu Bank and NIC Asia Bank had crossed double digits.

Commercial banks have already published their unaudited third quarter financial statements for the current fiscal year 2025-26

The statements show rising pressure from bad loans across the banking sector. Average NPLs increased from 4.8 percent in the third quarter of the previous fiscal year to 5.25 percent in the first nine months of the current fiscal year.

Under NRB regulations, an NPL ratio above 5 percent is considered risky. Seven out of 20 commercial banks have now crossed that threshold.

Howladar Yunus & Co. reviewed the loan portfolios of Nabil Bank, NIC Asia Bank, Nepal Investment Mega Bank, Prabhu Bank, Kumari Bank, Laxmi Sunrise Bank, Himalayan Bank, Global IME Bank, NMB Bank and Rastriya Banijya Bank.

Around 35 percent to 42 percent of total loan files were selected as samples during the review. Between 300 and 2,500 loan files from each bank were examined. NIC Asia Bank had the highest number of files reviewed due to its large volume of small loans.

The consultant assessed banks’ credit policies, loan classification, collateral valuation, risk management, provisioning practices, regulatory compliance and project monitoring systems. Loan files, core banking systems, project progress and repayment status were also examined.

The report found that some banks had engaged in 'evergreening”, or issuing new loans to hide bad loans.

It also identified indirect lending to directors and beneficial shareholders, inflated collateral valuations, income booking without adequate provisioning and additional lending without assessing actual project progress.

The report highlighted a practice of issuing fresh loans to repay existing loans, particularly in large project financing. It found weak project monitoring, inadequate field inspection records and continued lending despite poor physical progress of projects.

Under NRB directives, loans overdue by up to one month are classified under watchlist, up to six months as substandard, up to one year as doubtful and more than one year as bad loans.

Banks are required to maintain provisioning of 1 percent for pass loans, 5 percent for watchlist loans, 25 percent for substandard loans, 50 percent for doubtful loans and 100 percent for bad loans. The review found that some banks had failed to maintain adequate provisioning.

Nepal Rastra Bank has already sought clarification from the concerned banks. Further directives on additional provisioning, capital enhancement or other corrective measures will be issued after reviewing the banks’ responses and supporting documents.

NRB sources said the review has not identified any immediate systemic crisis in the banking sector.

“No serious problems capable of destabilising the overall financial system have been identified, but the review has clearly pointed out areas that need improvement,” the source said.

The IMF had made an independent loan quality review of 10 major commercial banks a condition for providing Nepal with the Extended Credit Facility. Nepal Rastra Bank selected Howladar Yunus & Co. through an international competitive bidding process and signed the agreement with the company on August 28, 2025.