For banks, few assets are as undesirable as the non-banking asset. This is a piece of property, usually land or a building, that a bank never wanted to own. It is collateral that has been repossessed from a borrower who could not repay their loan and then failed to sell at auction. For Nepal’s commercial banks, these unwanted properties are piling up at an alarming rate. Together, they hold over Rs43bn worth of them. This growing stock of unsellable land is the most visible symptom of a deepening sickness within the financial system, where bad loans are proliferating and the mechanisms for cleaning them up are failing.
The core of the problem is a dual crisis in lending and property. A slowdown in economic growth has made it harder for borrowers to service their debts, sparking a rise in non-performing loans. When a loan goes bad, a bank’s first recourse is to seize and auction the collateral. But Nepal’s property market is moribund; auctions are frequently unsuccessful. The bank is then forced to take the asset onto its own books. The fallout is a vicious cycle. Loans turn bad, the collateral fails to sell, the bank’s stock of non-banking assets grows, and its financial strength diminishes. This cycle is now spinning rapidly across the sector.
The data from the first quarter show profitability under severe pressure. The total net profit for the sector fell by nearly 19% year on year. This slump was not caused by a lack of business but by a massive surge in impairment charges—money set aside to cover possible loan losses. Banks allocated over Rs20bn for this purpose, a sum that eclipsed the entire sector’s net profit of Rs13bn. For some institutions, the figures are catastrophic. Nepal Investment Mega Bank saw its profit collapse by some 95%, while Citizens Bank fell into a net loss. In both cases, this was directly due to provisioning more than Rs1.7bn against bad debts.
This provisioning bump is both a response to and a reflection of deteriorating asset quality. A healthy banking system typically has non-performing loan ratios below 3%. In Nepal, the situation is far worse. Of 20 commercial banks, nine have NPL ratios above 5%, a level considered dangerous. Himalayan Bank is the most extreme case, with 7.39% of its loan book classified as non-performing. It also sits on nearly Rs6bn in non-banking assets and has accumulated losses outstripping Rs8bn. NIC Asia Bank presents another worrying case. It has been deliberately shrinking its loan book for 15 months; yet its NPL ratio has still climbed to 6.99%. This suggests the problem is not new lending but a legacy of older loans turning sour.
The piling up of non-banking assets creates a heavy drag on a bank’s vitality. These properties generate no income and tie up capital that could otherwise be used for new loans. To account for the fact that these assets may never be sold at their booked value, banks must make provisions, which directly hit their profits. Furthermore, a growing number of banks are showing negative retained earnings—a sign that accumulated losses have eroded their internal capital base. This limits their ability to pay dividends and weakens their capacity to absorb future shocks. The sector’s aggregate capital remains robust for now, but the foundations are cracking at several specific institutions.
The government and the Nepal Rastra Bank are aware of the problem. A previous legal hurdle, which prevented banks from holding land surpassing government-mandated size limits, was amended. Banks are now permitted to hold such properties for up to three years. Yet this regulatory fix has proven insufficient. The fundamental issue is a lack of buyers rather than legal permission. The market is frozen. This has led to a renewed and urgent discussion about a “bad bank”, a separate asset management company that would buy these sour loans and properties from commercial banks, allowing them to cleanse their balance sheets.
The concept of a bad bank has been floated in Nepal’s budgets and policy documents for years. It remains stuck in legislative limbo. Its continued absence points to a critical failure. Without a functional outlet, the toxic assets simply accumulate within the banking system, perpetuating the risk. Almost every commercial bank, with the notable exception of Standard Chartered Bank, now carries non-banking assets on its books. This is a systemic trouble. The collective provision for loan losses across the sector now tops Rs300bn, a staggering sum that underlines the scale of the problem.
Amid the gloom, a few institutions demonstrate that prudent management can provide some insulation. Everest Bank, with an NPL ratio of just 0.74%, and Standard Chartered Bank, at 1.71%, are notable standouts. Their low impairment charges and strong profitability show that conservative underwriting and rigorous risk management can shield a bank from the worst of the storm. Their success, however, highlights the failures elsewhere. For banks like Himalayan Bank, Kumari Bank and Nepal Investment Mega Bank, the path to recovery looks long and difficult, possibly requiring fresh capital or strategic overhauls.
The growing stock of unsold land on bank balance sheets represents economic potential that is frozen and a banking sector whose primary function, ie, to lend, is being compromised. The sharp spike in provisions is a necessary and painful cleansing process. Yet without a functioning market or a state-backed solution to absorb these bad assets, the cleanse remains incomplete. The properties remain, unwanted and unsold, a heavy burden on the financial system and a drag on Nepal’s economic prospects. ■