Kathmandu – The government is preparing to introduce a legal framework for the establishment of an Asset Management Company (AMC), following growing concerns over rising non-performing loans and non-banking assets in Nepal’s banking sector.

Although the government had announced plans to operate an Asset Management Company through the current fiscal year’s budget, the absence of a dedicated legal framework delayed implementation. As a result, the government has now moved toward drafting the necessary legislation.

Former Finance Minister Bishnu Paudel had earlier stated that an Asset Management Company would be established to manage bad loans and non-banking assets of banks and financial institutions. In line with that announcement, Nepal Rastra Bank also emphasized the need to formulate laws and draft regulations required for the establishment of such a company.

While unveiling the current fiscal year’s monetary policy, Governor Dr. Bishwo Nath Poudel stated that the central bank would prioritize the formation of an Asset Management Company to address growing inactive loans and non-banking assets within the financial system.

According to the central bank, the proposed company is expected to support banks and financial institutions in managing distressed assets and strengthening financial stability.

The issue gained further momentum after recommendations presented during the Third Banking Discourse organized by Banking News, where concerns were raised regarding the growing pile of real estate and other collateral assets accumulated by banks following loan defaults, especially after the COVID-19 pandemic.

The report submitted during the national-level discourse highlighted the urgent need for an Asset Management Company to address the increasing burden of non-performing loans and collateral assets in the banking sector. Following these discussions, Nepal Rastra Bank intensified its focus on the issue and officially announced plans to draft the required legislation.

In addition, both the High-Level Economic Reform Recommendation Commission and the Banking Sector Reform Recommendation Commission have also stressed the need for a legal basis to establish an Asset Management Company amid weakening loan recovery and rising bad assets.

According to sources at Nepal Rastra Bank, the central bank has already prepared the first draft of the “Asset Management Company Act” and submitted it to the Ministry of Finance for further review. The ministry has reportedly shown interest in advancing the proposal.

Meanwhile, Confederation of Banks and Financial Institutions Nepal (CBFIN) has also been advocating for the immediate establishment of an Asset Management Company. CBFIN Director General Roshan Koirala stated that the growing volume of non-banking assets in banks has made such a company increasingly necessary.

He added that Nepal could adopt a model similar to Malaysia’s approach to asset management and bad bank operations.

The government had previously introduced provisions for establishing an Asset Management Company through an ordinance by classifying it under the service industry category. With this legal recognition, the long-discussed plan to establish such a company is now moving forward nearly 25 years after it was first proposed.

International Practices

Neighboring India has established Asset Reconstruction Companies (ARCs) to manage bad loans and stressed assets. The companies operate under the supervision and regulation of the Reserve Bank of India.

India introduced the model during a period when rising non-performing loans and non-banking assets had weakened the country’s economy and banking stability.

Under Indian regulations, shareholders holding at least 10 percent equity participation can invest in Asset Reconstruction Companies. Experts believe Nepal could similarly establish a “bad bank” model involving public investment, reducing financial pressure on both the government and banks.

The Reserve Bank of India also allows Asset Reconstruction Companies to acquire distressed assets through auctions or bilateral agreements with banks and financial institutions.

Experts further suggest that Nepal could also learn from international practices adopted in countries such as United States, United Kingdom, and France in managing distressed financial assets and stabilizing the banking sector.