NRB appoints international auditor to review loan portfolios of top 10 banks

KATHMANDU, MAY 25: Nepal Rastra Bank (NRB) has resumed the process of reviewing the loan portfolios of the country’s ten largest commercial banks. This move comes as part of Nepal’s commitment under the Extended Credit Facility (ECF) agreement with the International Monetary Fund (IMF). To conduct this review, NRB has lately appointed Howladar Yunus & Co., a Bangladesh-based international audit firm.

Some three months back, the central bank had shortlisted six international firms from Sri Lanka, Bangladesh, and India to audit the loan portfolios. Following a technical evaluation, NRB’s Assets and Services Management Department selected Howladar Yunus & Co. for the assignment. The firm is now tasked with conducting a comprehensive loan portfolio review of the ten banks with the highest credit exposure in the country.

This initiative follows a previously unsuccessful attempt when the Indian firm of KPMG Assurance and Consulting Services Pvt. Ltd., initially selected for the task, had its proposal rejected, resulting in the cancellation of the audit process. In response, the central bank reinitiated the selection procedure to fulfil Nepal’s obligation under the ECF arrangement.

Under the ECF agreement, signed in 2021, the Government of Nepal, along with the NRB, committed to having the loan portfolios of the top 10 commercial banks audited by an independent international firm. The IMF made this a key condition for approving a $395 million concessional loan to Nepal, to be disbursed in seven tranches over 38 months. Nepal has already received five tranches, with approximately $87.09 million (NPR 11.93 billion) remaining.

The IMF had raised concerns regarding the accuracy of reported non-performing loans (NPLs), ineffective collateral valuation practices, and weak financial discipline in Nepal’s banking sector. It emphasized the need for an independent audit to assess the true quality of bank assets and ensure transparency.

During a mission visit to Nepal from September 11 to 22, the IMF team stressed the urgency of initiating the loan portfolio review. The team noted the rising level of NPLs and inadequate capital buffers in some banks, underscoring the need for enhanced oversight and immediate review of the banking sector’s credit exposure.

The IMF also recommended amending the related NRB Act to prioritize third-party audits and improve transparency in the financial system. It expressed concern over the practice of “loan evergreening,” where banks issue new loans to borrowers unable to repay previous ones—an approach that can conceal bad loans and pose systemic risks.

Additionally, development partners have raised questions about potential underreporting of NPLs, possibly to allow banks to continue dividend distributions, which is prohibited if NPLs exceed regulatory limits. Concerns have also been raised about credit concentration among a limited number of business groups and insufficient collateral coverage on issued loans.

Howladar Yunus & Co., having submitted the highest-rated proposal, has been formally selected for the assignment and is required to submit its financial proposal by June 7.