KATHMANDU: Nepal Rastra Bank (NRB) has warned that several commercial banks could fail to meet minimum capital adequacy and liquidity requirements if the banking sector faces a sharp deterioration in loan quality, large-scale deposit withdrawals, or severe operational disruptions.

In its recently published Financial Stability Report, the central bank said Nepal’s commercial banking system remains broadly resilient. However, stress tests indicate that significant shocks to credit quality, liquidity, or operations could leave a considerable number of banks unable to comply with regulatory capital and liquidity standards.

Using revised stress-testing guidelines and data as of mid-July 2025 (Asar-end 2082), NRB assessed the resilience of all commercial banks against credit, liquidity, market, and operational risks.

The report identifies credit risk as the banking sector’s most significant vulnerability, citing the steady rise in non-performing loans (NPLs) in recent years. It found that if 15% of performing loans were downgraded to substandard status, six commercial banks would see their Capital Adequacy Ratio (CAR) fall below the regulatory minimum of 11%. If just 5% of performing loans became non-performing, the number of banks failing to meet the minimum capital requirement would double to 12.

The report further states that if the two largest loan exposures of each bank turned into bad loans, nine commercial banks would no longer maintain the required minimum capital adequacy ratio.

Stress-test results also show that a sharp deterioration in loan quality would significantly weaken the banking system’s overall asset quality. If 15% of performing loans became substandard or 5% turned into bad loans, the NPL ratio of all 20 commercial banks would exceed 5%. Further deterioration in watchlist, substandard, and doubtful loans could also push the NPL ratio above 5% in five to twelve banks, the report noted.

The NRB also warned of heightened liquidity risks in the event of substantial deposit withdrawals. Under a stress scenario where deposits decline by 2%, 5%, and 10% per day over five consecutive days, two commercial banks would face liquidity shortages by the fifth day, highlighting vulnerabilities despite the sector’s overall stability.