Every year, the Bank Supervision Department of Nepal Rastra Bank publishes a report that deserves a wide readership well beyond the supervisory community. The 2024/25 edition is a thorough and self-aware account of where the banking sector stands. Its strength is candour. The department sets out, in plain terms, the areas where supervisory expectations and bank practice have drifted apart, and it directs corrective action accordingly.

Read alongside the latest key financial indicators, the report offers a balanced picture. The headline figures point to a sector that continues to grow. Total assets of commercial banks rose 12.45 percent to Rs. 7,756.23 billion. Deposits climbed 13.63 percent to Rs. 6,541.65 billion. Loans expanded 10.49 percent to Rs. 4,963.15 billion. System capital adequacy, as of mid-April 2026, stood at 12.53 percent against an 11 percent floor. The structural foundations remain intact, and the report says as much.

What distinguishes this year’s report is its willingness to look past the headline ratios and examine how those ratios are constructed.

Capital ratios under the supervisory lens
A central theme of the report is the integrity of the capital adequacy ratio. The department’s onsite reviews found that reported ratios did not always reflect the underlying risk position accurately, and it has set out to close that gap.

“Capital Adequacy Ratios were not reflected accurately due to misstatement of risk-weighted exposures and inadequate recognition of loan loss provisions.”
Bank Supervision Report 2024/25, Section 5.1.2

The point is technical but consequential. A capital ratio is a fraction, with capital on top and risk-weighted exposure on the bottom. When the denominator is understated, the ratio appears stronger than the bank’s true position warrants. The report identifies the specific practices that produced this effect, which is precisely the kind of granular finding that makes supervisory follow-up possible.

Among the observations, the department noted that some past due loans, those classified as watch list, substandard, doubtful, or loss, were assigned lower risk weights than their classification implied, and that certain unpaid guarantee claims were excluded from risk-weighted exposure. The report records the combined effect as understated risk and overstated asset quality. It also noted that some loans were placed within the Regulatory Retail Portfolio on the basis of a single threshold rather than the full set of qualifying conditions.

Reported capital ratios sit modestly above the regulatory minimum. The report’s focus on accurate risk-weighting is intended to keep that margin meaningful. Source: NRB Key Financial Indicators, mid-April 2026.

This is why the department’s attention to risk-weighting matters. State-owned banks report a core capital ratio of 10.22 percent, the private group 9.52 percent, and the system 9.61 percent, each modestly above the 8.5 percent core requirement. Accurate measurement of the denominator is what keeps those margins genuine, and the report’s emphasis on getting the measurement right is a strengthening of the prudential framework rather than a departure from it.

Strengthening internal capital planning
The report also turns to the Internal Capital Adequacy Assessment Process, or ICAAP, the exercise through which a bank judges for itself whether it holds enough capital for the risks it runs. The department found scope to deepen this practice across the industry.

The reviews observed that some banks had not completed their annual ICAAP within the timelines their own policies and the regulator prescribe. In several cases the risk appetite and target capital levels mirrored the regulatory minimum rather than reflecting the bank’s specific risk profile, additional buffers were not fully assessed, and the policy did not define minimum thresholds for Common Equity Tier I and Tier I capital. The report further noted that some banks had yet to develop a structured capital management policy spanning both the short and the longer term.

“The absence of short-term capital management strategy and a comprehensive medium-term or long-term capital plan would exacerbate the challenges of managing potential future financial crises.”
Bank Supervision Report 2024/25, Section 5.1.2

The report’s message is constructive: capital planning should look forward to the bank’s own risks, not stop at the regulatory floor.

What the numbers show
The report is equally clear about asset quality, and the figures it presents are worth highlighting. Non-performing loans rose 22.40 percent during the year to Rs. 220.33 billion, and the NPL ratio moved to 4.44 percent from 3.76 percent. Non-performing loans at state-owned banks rose 26.31 percent. Non-banking assets increased 41.77 percent. These are the department’s own published figures and disclosing them transparently is itself a sign of supervisory confidence.

Non-performing loans have risen over three years, reaching a 4.44 percent ratio in FY2024/25. Source: Bank Supervision Report 2024/25.

The report places this trend in a wider context. Deposits have continued to flow into the banking channel faster than credit has been deployed. The deposit-to-GDP ratio rose to 105.51 percent while credit-to-GDP eased to 80.05 percent, and the credit-to-deposit ratio settled at 75.02 percent. The sector holds ample liquidity, which gives banks and the regulator room to manage asset quality from a position of relative strength.

Deposits have grown faster than credit, leaving the sector well-funded. Source: Bank Supervision Report 2024/25, Table 6.

On earnings, the report records that total net profit rose 5.90 percent to Rs. 52.82 billion. The composition is uneven across ownership groups, with state-owned banks posting a 76.08 percent increase while private banks recorded a 2.75 percent decline, and net interest income easing 1.25 percent across the sector. The picture supports the report’s broader emphasis on building resilience while the system is profitable.

Net profit grew at the system level, with variation across ownership groups. Source: Bank Supervision Report 2024/25.

Why the report matters beyond the banks
A supervisory report that documents its findings in this detail serves the whole financial system, not the banking sector alone. For the Deposit and Credit Guarantee Fund, accurate capital and asset-quality data support sound risk pricing. For investors and analysts, the report’s disclosures provide a more complete basis for valuation. For the interbank market, confidence in reported figures underpins the trust on which short-term lending depends. By identifying measurement gaps early, the report helps each of these participants work from sounder information.

The report is candid about the supervisory task ahead, framing it as a shift toward substance over form.

“NRB’s challenge is to move beyond checklist-based supervision to a model that can identify when the economic substance of a loan contradicts its reported form.”
Bank Supervision Report 2024/25, Section 5.3.1

This is a forward-looking statement of supervisory philosophy. Substance-based supervision is more demanding and more dependent on judgement, and the department’s willingness to name it as a direction of travel signals a maturing of Nepal’s risk-based supervision framework.

The corrective direction the report sets
The report does not stop at observation. It records that directives have been issued for corrective reform, and the direction it sets out can be read across several themes.

1. More rigorous risk-weight verification. The report’s emphasis on the gap between reported and actual risk-weighted exposure points toward closer reconciliation between bank submissions and supervisory assessment, supported by the department’s XBRL-based Supervisory Information System.

2. Accurate loan classification and provisioning. The findings on misclassified exposures and guarantee claims point toward consistent classification and full provisioning, so that reported asset quality reflects the underlying position.

3. Deeper ICAAP practice. The report’s direction is for capital plans that reflect each bank’s own risk profile, define Common Equity Tier I and Tier I thresholds above the minimum, and incorporate stress testing rather than mirroring the regulatory floor.

4. Stronger independence of control functions. The report’s observations on governance support reporting arrangements in which risk and audit functions are evaluated through board committees, reinforcing their independence.

5. Forward-looking capital and provisioning. With asset quality softening while earnings remain positive, the report’s emphasis on capital planning supports building buffers and provisions ahead of any future stress.

Taken together, these directions reflect a supervisor acting early and transparently. The most reassuring feature of the 2024/25 report is that it exists in this form. A department willing to document, in a public report, where practice needs to improve is a department doing its job well. The corrective directives are now in place, and the sector’s task is to implement them in the same constructive spirit in which they were issued.

Figures sourced from the Nepal Rastra Bank Bank Supervision Report 2024/25 and the NRB Key Financial Indicators of Commercial Banks as on mid-April 2026. This commentary reflects the author’s personal reading of a public document and does not represent the views of any institution.