The average non-performing loan (NPL) ratio of development banks has climbed close to 10 percent in the first quarter of the current fiscal year 2025/26.

According to unaudited financial statements of the Class ‘B’ financial institution, the average NPL ratio reached 9.86 percent at mid-October. This marks a sharp rise of 1.98 percentage points from 7.89 percent in the same period of the previous fiscal year. 

The increase in NPL levels has been attributed to a slowdown in new credit disbursement and weak recovery of principal and interest from existing loans, which have together intensified pressure on the overall financial health of the banking industry.

The analysis is based on financial statements from 16 out of 17 development banks. The Karnali Development Bank, which the NRB recently placed under management control after declaring it troubled, has not published its first-quarter results.

Among the 16 development banks, 11 reported a rise in their NPL ratios compared to the previous fiscal year, while only five managed to reduce their bad loans.

Narayani Development Bank recorded the highest NPL ratio at 57.04 percent, signaling severe financial distress and poor loan quality. In contrast, Miteri Development Bank reported the lowest ratio of just 0.55 percent.

Narayani’s NPL level surged sharply from 34.81 percent in the same quarter of the previous fiscal year. Along with Narayani, two other development banks — Saptakoshi (11.5 percent) and Corporate (11.77 percent) — also have NPL levels in double digits.

Only five development banks — Miteri, Salpa, Sindhu, Excel, and Saptakoshi—managed to reduce their NPL ratios during the review quarter compared to the same period last year.

Likewise, 10 out of 16 development banks now have NPL levels exceeding 5 percent. The deterioration in loan quality comes amid prolonged economic slowdown over the past two years. This was further aggravated by the Gen Z protests in the second week of September which disrupted business activities and delayed loan repayments.

Loans and advances of banks and financial institutions are broadly categorized into performing and non performing loans, primarily based on past due period of interest or principal receivable. Pass and watchlist categories fall under performing loans whereas non performing loans include substandard, doubtful, loss and restructured/rescheduled loans.

Since banks are required to set aside higher provisioning for bad loans, higher NPL levels affect.