Rising Bad Loans Pose a Serious Challenge for Banks in Nepal

Banks in Nepal are grappling with the growing issue of non-performing assets (NPA) and excessive liquidity. The increasing volume of bad loans and the challenges of loan recovery have placed banks in a precarious position.

The NPA, which stood at around 1% a few years ago, has now risen to over 4% for most banks. This upward trend has adversely affected the financial stability of banks. Inability to collect regular principal and interest payments from loans disbursed in the past has significantly contributed to the rise in bad loans.

Recovering bad loans has become a daunting task, often accompanied by risks to the safety of bank employees. A recent incident involving NIC Asia Bank’s Chandranigahpur branch highlighted the gravity of the situation. Bank employees were attacked with petrol and nearly set on fire while attempting to recover loans.

The incident involved borrower Narayan Sahani and his family, who allegedly abused, assaulted, and attempted to harm the employees with a lighter and petrol during a visit to initiate the legal process of auctioning collateral. Such events have created fear among bank staff, hindering their ability to perform loan recovery tasks.

Borrowers have also been resorting to protests and locking bank branches in response to the auctioning of their assets. Recently, borrowers locked Siddhartha Bank’s Janakpur branch, accusing the bank of unfairly auctioning their property. Similarly, protests occurred at Agricultural Development Bank’s Lahan branch over allegations of undervaluing and auctioning prime real estate.

Addressing the rising bad loans and loan recovery challenges requires immediate and strategic action:

• Improved Risk Assessment: Banks must implement stringent risk assessment procedures before disbursing loans.

• Employee Safety: Legal and procedural safeguards should be established to ensure the safety of bank employees involved in recovery operations.

• Borrower Engagement: Strengthening communication and fostering dialogue with borrowers could help mitigate disputes and reduce tensions.

The growing challenge of bad loans and recovery issues threatens the financial health of banks in Nepal. To stabilize the banking system, it is crucial for banks to adopt effective strategies for managing NPAs and improving loan recovery mechanisms. Support from the government through appropriate policies and frameworks will also be vital in addressing these challenges.