KATHMANDU: Former officials of Nepal’s central financial institutions have raised serious concerns about the true state of the country’s banking sector, claiming that many banks are hiding the real scale of bad loans, also known as non-performing loans (NPLs), through accounting manipulation known as “window dressing.”
During a meeting of the Finance Committee of the Federal Parliament on Wednesday, former Deputy Chair of the National Planning Commission Dr. Min Bahadur Shrestha and former Executive Director of Nepal Rastra Bank (NRB) Nar Bahadur Thapa delivered detailed presentations on the country’s financial health.
In his presentation, Thapa said that banks are showing far lower NPL figures than what actually exist.
“Banks claim that their NPL is around 5%, but this is artificially reduced through window dressing. In reality, NPLs could be as high as 14–15%,” he said.
According to Thapa, this is the main reason banks have been reluctant to lend, despite having sufficient liquidity.
Window dressing refers to the practice of altering financial statements to make an institution appear healthier than it actually is. Thapa alleged that banks have manipulated their capital adequacy ratios and failed to meet actual capital requirements.
“While the NRB shows that banks maintain around 12.5% capital adequacy, most banks lack the capital required to support new loans,” he said.
Adding to the concerns, Rastriya Swatantra Party lawmaker and economist Dr. Swarnim Wagle highlighted the dangers of hiding NPLs.
“If the real NPL figure is around 15%, this is a serious crisis. We need reliable disclosures and immediate reforms,” he said.
Bhagwati Chaudhary, a lawmaker from the CPN-UML and active in the microfinance sector, echoed the same sentiment. She argued that the true NPL figures in microfinance and rural banks could be as high as 20–25%.
“Even though banks claim only 5–7% NPLs, everyone in the industry knows the situation is far worse,” she said, also pointing out the dire situation in cooperatives.
According to NRB’s most recent data as of mid-June, the average NPL across all banks stood at 5.24%. Among them, commercial banks showed 5.05%, development banks 5.56%, and finance companies 13.04%.
Thapa warned that the central bank’s policy of loan rescheduling, known as rescheduling or “residualization”, could further delay the recognition of bad loans and inflate the hidden risk in the system. He cited India’s past experience, where bad loans reached 14% and required direct government intervention to stabilize the banking sector.
Just last week, the NRB extended the deadline for loan rescheduling under its updated working capital loan guidelines until mid-July 2027. In January, the central bank took over the management of Karnali Development Bank after its NPL reached nearly 49%.
As of the end of March, nine commercial banks had reported NPLs above the 5% mark, with Himalayan Bank showing the highest at 7.68%. Development banks and finance companies continue to report even higher average NPLs.
Experts have blamed poor supervision by the central bank for the deteriorating situation, and calls for transparency and stricter oversight are growing louder as the country’s financial sector braces for the upcoming monetary policy announcement.
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