NPL Levels Rise to 4.62%: Are Credit Risks Growing Across Class A, B, and C Banks?

As of Saun End, 2082 (Mid-August 2025), Nepal’s banking sector is showing signs of increasing stress in asset quality, with the overall Non-Performing Loan (NPL) ratio rising to 4.62%. This figure signals a growing credit risk across different classes of banks, though the intensity varies significantly. Commercial banks (Class “A”) maintain an NPL ratio of 4.44%, which, while higher than global benchmarks of 2–3%, is still lower than other domestic categories. Development banks (Class “B”) report NPLs of 5.03%, and finance companies (Class “C”) face a worrying 11.05%, more than double the system average.

This disparity indicates that larger commercial banks, with diversified portfolios and stronger governance, are better positioned to manage loan performance, while smaller institutions remain highly exposed to credit quality deterioration. Development banks and finance companies often cater to riskier borrower segments such as SMEs and rural customers, where economic volatility or repayment challenges can quickly translate into loan defaults.

The rise in NPLs also reflects broader macroeconomic pressures. Sluggish growth in key sectors such as real estate, hydropower, and trade, combined with inflation and political uncertainty, has strained borrowers’ repayment capacity. The increase in defaults has forced banks to maintain higher Loan Loss Provisions (LLPs at 5.09% of total loans), which protect balance sheets in the short term but reduce profitability.

From a systemic perspective, a 4.62% NPL ratio is not yet at crisis levels, but the trend points toward rising risks if unchecked. If defaults continue to climb, banks could face pressure on capital buffers, especially in smaller institutions with limited financial resilience. For the overall economy, high and rising NPLs risk slowing down new credit flows, as banks may become more cautious in lending, thereby dampening growth prospects.