Loan Portfolio Review Flags Issues in Project Financing by Large Commercial Banks

Nepal’s large commercial banks have faced problems in loans extended to major projects, particularly due to a mismatch between loan disbursement and physical progress of construction, according to a loan portfolio review conducted by a Bangladeshi consulting firm.

A study by Howladar Yunus & Company, which has been entrusted with conducting a loan portfolio review of 10 large commercial banks, found that projects have failed to achieve proportional physical progress relative to the amount of credit disbursed.

Nepal Rastra Bank (NRB) Executive Director Dirgha Bahadur Rawal flagged the issue during a discussion with chief executive officers of banks and financial institutions last Wednesday. Quoting Rawal, one participating CEO said projects have not progressed in proportion to the loans disbursed by banks. “The fact that project loans rarely decline and that loan limits are increased even after projects become operational is a serious concern.”

Commercial banks have extended loans for the construction of hydropower projects, cement factories, hotels and other industrial ventures. However, the study found that banks have failed to effectively conduct on-site inspections of these projects to assess whether loans were being properly utilized.

Howladar Yunus & Company signed the loan portfolio review agreement on August 28, 2025, and has completed on-site inspections. The firm is currently analysing the data and information collected during the process. Preliminary findings show that most banks’ loan portfolios are heavily concentrated in real estate, construction, housing, and wholesale/trading sectors, with some banks approaching their sectoral concentration limits.

Under the agreement with NRB, the consulting firm is required to complete the review within five months and submit its final report by January 26, 2026. Stating that the central bank is pressing the consultant to submit a preliminary report by December, NRB Spokesperson Guru Prasad Paudel declined to comment on the identified weaknesses.

The loan portfolio review evaluates banks based on indicators such as credit policies and procedures, loan classification, collateral valuation, provisioning practices, and regulatory compliance. The consultant is also reviewing loan files, core banking systems, project investment status and loan repayment performance in detail.

NRB selected the banks for review based on their loan exposure as of the mid-April 2025 balance sheet, focusing on institutions with higher credit investments. The banks under review are Global IME Bank, Nabil Bank, Nepal Investment Mega Bank, Rastriya Banijya Bank, Kumari Bank, Laxmi Sunrise Bank, Prabhu Bank, Himalayan Bank, NMB Bank and NIC Asia Bank. The review will cover 63 percent of total outstanding loans of commercial banks.

The International Monetary Fund (IMF) had made the loan portfolio review of the 10 largest commercial banks a precondition for providing Nepal with support under the Extended Credit Facility (ECF). Accordingly, NRB selected an international consultant through a competitive bidding process.

The IMF has repeatedly expressed concerns that Nepali banks have adopted lenient loan classification practices, maintained insufficient risk provisioning, engaged in loan evergreening, and operated with weak credit risk management systems.