Nepal Rastra Bank Tightens Rules on Profit Distribution by Banks

Nepal Rastra Bank (NRB) has introduced strict provisions to curb discrepancies between banks’ unaudited and audited financial statements, particularly regarding reported profits. The new rules were issued on Wednesday through a revised procedure governing financial statement publication and dividend approval for banks and financial institutions.

Under the new provisions, banks must transfer to a regulatory reserve any loan loss amount that appears lower than the requirement set by the Nepal Financial Reporting Standards (NFRS). Similarly, amounts arising from capitalized interest during grace periods must also be allocated to the regulatory reserve.

The central bank revised the procedure after observing a growing trend among banks to report inflated profits in unaudited financial statements. Going forward, NRB will check compliance with the Expected Credit Loss Guideline (NFRS-9) and the Guidance Note on Interest Recognition 2025 before approving financial statements.

Meanwhile, dividend distribution has also been tightened, allowing banks to distribute dividends only on non-redeemable cumulative preference shares from current-year profits. The use of retained earnings or other reserves for such payouts has been prohibited. Institutions that have issued debentures or other debt instruments must also clearly disclose whether proportional amounts have been set aside in payment funds.

NRB has further mandated actuarial valuation of employee liabilities using realistic assumptions based on past data. In addition, 20 percent of income recorded in the “Statement of Comprehensive Income” after profit must be transferred to the general reserve fund before distribution. Banks are also required to disclose separately in financial statement notes any amounts deposited into or spent from regulatory reserves.

The regulatory reserve will now compulsorily include merger and acquisition reserves, potential tax liabilities arising from non-banking assets, employee bonuses, and remaining statutory fund allocations.

Moreover, banks must distinctly disclose deposits, expenditures, and balances of all types of reserves in the notes of accounts. For annual general meetings, audited financial statements must receive prior approval from NRB.

NRB stated that some banks had been under-provisioning for loan losses, thereby overstating profits in unaudited reports.