Non-banking assets of the banks and financial institutions have surged past Rs 50bn as bad loans rise and banks fail to offload collateralized properties. According to Nepal Rastra Bank, BFIs collectively held Rs 50.56bn worth of NBAs as of the first month of the current fiscal year i.e. mid-August. Commercial banks, development banks and financial institutions held Rs 7.69bn worth of such assets in mid-July 2021. It increased to Rs 10.52bn in 2022 and further to Rs 18.68bn in mid-July 2023.

NBAs nearly doubled to Rs 35.5bn in mid-July 2024 as the central bank withdrew facilities provided to borrowers as a relief during the Covid-19 pandemic. It increased further to Rs 50.55bn in mid-July this year.   Most of these collateralized properties are in the form of land and houses. 

Banking experts say non-banking assets are piling up as banks have not been able to auction off properties due to a lack of buyers amid slowdown in land and housing transactions. “Since there is a lack of liquidity in the market since the cooperative sector ran into trouble, banks have been unable to find buyers for land and houses under their ownership,” a banker said. “In such a situation, banks have no option but to keep collateralized properties under their books.”

As per the existing laws, banks must issue successive auction notices of 35 days, 21 days and seven days before starting the process of disposing off collateral. Banks can proceed with auction notices only if borrowers remain unresponsive to banks. Even after going through this lengthy process, banks are finding few buyers for land and houses under their books. 

Compounding the woes for BFIs is a provision in the Land Act, 2021, which requires banks, financial institutions and cooperatives to sell off foreclosed land within three years. With non-banking assets piling up, banks have been lobbying to relax this provision.

Bankers have long been calling for the formation of a ‘bad bank’ to take over their distressed assets. The High-level Economic Reforms Advisory Commission led by Former Finance Secretary Rameshore Prasad Khanal suggested to the government to form an agency to manage non-banking assets in the banking system.

Khanal has now been appointed as the Minister for Finance in the interim government led by Sushila Karki. The central bank has already drafted legislation to facilitate such a body and forwarded it to the finance ministry for approval.