By Shanker Man Singh
Mark Twain once quipped, “A bank is a friend who lends you his umbrella when the sun shines, but wants it back the moment it starts to rain.” This humorous remark underscores the inherently risk-averse nature of banks: they are willing to offer financial support during good times, but tend to retreat when clients face financial distress.
Amid Nepal’s ongoing economic downturn, concerns over blacklisting are becoming more prominent. The surge in loan defaults and bounced cheques has triggered a significant rise in the number of individuals and companies being blacklisted by banks and financial institutions. At first glance, this trend appears to be a direct consequence of the economic hardships affecting the ability of businesses and individuals to fulfill their financial commitments.
Rising Blacklisting Cases
The number of blacklisted individuals and firms has spiked in recent years—particularly during the first eleven months of the last fiscal year. According to the Credit Information Center (CIC) of the Central Bank, 38,685 individuals were blacklisted from Shrawan to Asar 17 in fiscal year 2081/82, a stark increase from previous years. In contrast, only 2,947 were blacklisted during Asar 1 to 17, while the corresponding figure in the same period the prior year was just 1,096.
According to the CIC, 70% of these cases stemmed from cheque bounces, and the remaining 30% from unpaid loans. These trends reflect the rising difficulties in loan recovery—an issue that has worsened since the COVID-19 pandemic, with over 200 new cases emerging daily.
Economic Recession and its Consequences
Nepal’s economic slowdown has had a domino effect across multiple sectors. Businesses and individuals alike are struggling to repay loans and meet financial obligations, which is reflected in the rising number of non-performing loans (NPLs).
As banks and financial institutions face increasing challenges in recovering bad debts—despite initiating legal proceedings through asset management companies—the financial health of the entire banking sector is being compromised. Not only do bounced cheques contribute to blacklisting, but they also signal deep-rooted financial distress.
The inability to maintain regular economic activity has had direct repercussions on banks’ financial statements. Key indicators such as declining profits, reduced credit expansion, rising bad loans, shrinking net interest income, and falling return on assets (ROA) illustrate the broader economic malaise.
Regulatory Gaps and Risk Management
In light of these challenges, it has become increasingly necessary to institutionalize the role of Governance Officers not only in the banking sector but across all industries. When the economy falters, the banking sector cannot remain immune from its effects. An unhealthy banking sector, in turn, drags the broader economy into a vicious cycle of stagnation.
Global efforts to uphold transparency and discipline in the financial sector highlight the urgency for reform in Nepal. While some argue that high NPL levels can be managed through adequate loan loss provisions, the true test of a bank’s asset quality remains its NPL ratio. This is a critical metric that Nepal Rastra Bank must monitor seriously.
According to research by the International Monetary Fund (IMF), a banking crisis becomes increasingly probable once the NPL ratio crosses 7%. With banks’ net interest income dwindling and bad loans rising, it is only natural for profits to decline.
The Broader Impact of Credit Mismanagement
The economic contraction has had wide-ranging impacts, particularly on small and medium-sized enterprises (SMEs). While large businesses have been affected, the real strain is now evident among small traders and entrepreneurs.
Historically, weak loan appraisal processes and false income declarations by borrowers allowed unqualified individuals to access credit. Although these lending practices have improved, and stricter checks and balances are now in place, further regulatory oversight is necessary. Strengthening regulation and supervision is essential—not only to protect banks, but also to create more responsible lending ecosystems.
Addressing Non-Performing Loans (NPLs)
To protect earnings, banks must aggressively minimize their non-performing assets (NPAs). Regulators have imposed strict NPL guidelines, but many believe that monetary policy alone cannot stimulate credit demand.
A dynamic market economy, driven by effective fiscal policy, is essential to create demand for credit. Unfortunately, the government’s weak performance in capital expenditure has stifled this growth, preventing the necessary boost in loan demand.
Moreover, restructuring repayment terms can help borrowers who are willing but unable to repay. However, intentional defaulters—those who can repay but choose not to—pose a serious threat to banks. In such cases, banks must rely on legal proceedings to recover assets.
Financial Stagnation and Interest Rate Hurdles
The prolonged economic stagnation has resulted in a scarcity of investable funds, which in turn has driven interest rates upward. With rates rising above 12%, many borrowers have found it nearly impossible to service their loans, exacerbating defaults.
Maintaining Public Trust in Banks
As both credit risks and negative perceptions about banks grow, the sector faces increasing instability. Yet despite these challenges, the banking system remains relatively resilient. Approximately 30% of bank assets remain liquid, providing a buffer against wider financial shocks.
In the past, non-performing loan ratios and other banking metrics were included in the Macroeconomic Reports published by Nepal Rastra Bank. With the release of the latest Banking Sector Report and Monetary Policy 2082/83, it is hoped that these issues will be addressed more effectively.
Given the shift in policy focus towards the capital market and real estate sectors, we anticipate tighter regulatory oversight and stronger supervisory frameworks in the months ahead.
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