Kathmandu – Nepal Rastra Bank (NRB) has set a new limit for non-performing loans (NPLs) for banks and financial institutions. The central bank announced this decision while issuing a notice on Sunday regarding the investment of NPR 479 million from various funds into fixed deposits of banks and financial institutions.

Previously, NRB had maintained the NPL limit at 5%. However, with the increasing trend of bad loans and inactive credit, the central bank has now revised the threshold. As per the new directive, banks and financial institutions bidding to secure fixed deposits from NRB’s funds must ensure their NPL ratio does not exceed 8%, and their net inactive loan ratio remains below 3%.

This move also marks NRB’s acknowledgment that the NPL ratio of banks and financial institutions has surpassed the previous 5% limit. Until now, only institutions maintaining an NPL ratio below 5% were eligible to participate in deposit auctions. While NRB had previously considered 5% as a standard threshold, the new directive raises the limit to 8%.

Governor Acknowledges Challenges in Bad Loan Management

NRB Governor Maha Prasad Adhikari has repeatedly pointed out that ineffective monitoring by banks has contributed to the rise in bad loans. He has also cited sluggish economic activity, economic slowdown, recovery challenges, and declining business confidence as key reasons behind the increasing NPL ratio. The banking sector has been facing various challenges, particularly since the COVID-19 pandemic.

The growing number of bad loans and non-banking assets has intensified concerns in the banking industry. Previously, banking experts had also advocated for increasing the NPL limit. Their continuous pressure, along with the rising NPL figures, is believed to have led NRB to revise the threshold.

Four Banks to Benefit from the New Limit

The revised NPL threshold is expected to ease the situation for banks struggling with high bad loans. With this change, four commercial banks with NPL ratios exceeding 5% stand to benefit. Based on the financial statements for the second quarter of the current fiscal year, these banks are Nepal Investment Mega Bank, Kumari Bank, Laxmi Sunrise Bank, and Prabhu Bank.

Now, even banks with NPL ratios above 5% can participate in the bidding process for fixed deposits from NRB’s funds, which provides relief to these four commercial banks. Additionally, six other commercial banks, including Himalayan Bank, Rastriya Banijya Bank, Prime Commercial Bank, Agricultural Development Bank, and Nepal Bank, have NPL ratios close to 5%, ranging slightly above 4.90%.

Allegations of Favoritism in Policy Adjustment

Meanwhile, some industry insiders have criticized NRB’s decision, alleging that the revision was made to serve its own interests. Analysts argue that during a time when banks have excess liquidity, NRB is making it easier for banks with higher NPLs to access deposits, instead of allowing those funds to remain unused.

A senior official from a commercial bank stated, *”NRB should have introduced this policy during a liquidity crisis, not when there is excess liquidity in the market. Right now, banks are not eager to take deposits from NRB’s funds, which seems to be the main reason behind this move.”