After two decades of ongoing discussion, the Government of Nepal has finally included the concept of establishing a “Bad Bank” in its official policy and program for the upcoming fiscal year 2082/83. This marks the first formal step toward the creation of an Asset Management Company (AMC) aimed at addressing the growing issue of non-performing loans (NPLs) and non-banking assets in the country’s banking sector.

Nepal’s banking and financial institutions have long struggled with rising levels of bad loans and unmanaged collateral. The increasing pressure from these financial burdens has brought the need for a centralized mechanism to manage such distressed assets to the forefront of policy discussions.

Presenting the policy and program in a joint session of the Federal Parliament, President Ramchandra Paudel stated, “The second Financial Sector Development Strategy will be implemented. An Asset Management Company will be established for the management of non-performing loans and non-banking assets of banks and financial institutions.”

Implementation Still Unclear

Despite the announcement, uncertainty looms over the practical implementation of the plan. Past policies introduced in government budgets have often remained unexecuted. Experts point out that while including the Bad Bank in policy is a significant step, ensuring effective execution remains a challenge.

The idea of a Bad Bank in Nepal dates back 23 years. At the time, the Nepal Rastra Bank (NRB) had formed a task force chaired by then-executive director Rajan Singh Bhandari to explore asset management and loan recovery mechanisms. Members included Bhishma Dhungana (NRB), and bankers Parshuram Kunwar and Manoj Goyal. Although the task force submitted a report, the idea was shelved, citing that banks already had sufficient legal authority to recover loans without a separate AMC.

However, the re-emergence of bad loans and unmanaged collateral, particularly after the COVID-19 pandemic, has revived the need for a specialized institution. In response, the NRB proposed the idea of an AMC in its monetary policy for FY 2081/82 and began drafting an Asset Management Act.

Ironically, Rajan Singh Bhandari, who led the initial task force, now argues that the current level of NPLs—around 7%—does not warrant a full-fledged Bad Bank. “Back then, government banks had bad loan ratios above 50%. Today, the figure is less than 5% in most cases. Rather than establishing an AMC, private banks should focus on strengthening internal recovery mechanisms,” he told Banking News.

Policy Support and Legal Facilitation

The government has already taken steps to ease the legal pathway for establishing an AMC. Through an ordinance, it has classified the AMC as a service industry, enabling further facilitation for its setup and operations. Nonetheless, observers say that it took the government far too long—over two decades—to act on an idea widely accepted as crucial for financial reform.

Experts in the financial sector view the government’s move as a long-overdue but essential step. They believe that an AMC could significantly ease the burden on banks when it comes to managing distressed assets.

Ramesh Kumar Bhattarai, Chairman of NexGen Management, criticized the government’s delayed response. He noted that internal conditions within banks have deteriorated significantly due to the unchecked rise in bad loans. While the government’s policy statement is a positive sign, he expressed concern that actual implementation may still be far off.