Nepal must immediately establish a dedicated, legally empowered National Asset Management Company (AMC) framework to purchase large, distressed real estate assets and non-performing loans from commercial banks
In July 1997, a slow realisation spread across Bangkok that a financial crisis had begun. For years, Thailand's economy had been celebrated as a premier model of rapid growth – a vibrant nation pulled by easy credit, skyrocketing real estate property, and widespread optimism. Yet, behind those impressive headline numbers, structural imbalances were building beneath the surface.
Under sustained pressure from global currency markets, the Bank of Thailand was forced to abandon its fixed exchange rate regime. The Thai baht was floated, triggering an immediate currency devaluation that quickly evolved into a regional financial crisis. Over the following months, the contagion extended across East Asia, touching banking institutions in South Korea, Indonesia, and Malaysia.
Decades later, financial observers in Kathmandu are examining these historical patterns, asking whether Nepal is displaying similar early indicators of structural stress that call for timely intervention.
To appreciate why the 1997 crisis remains relevant to Nepal, one must look beyond obvious macro-structural differences. The Nepalese rupee is pegged directly to the Indian rupee, cross-border foreign capital mobility is strictly managed, and domestic banks do not carry the massive foreign-currency obligations that exposed Thai corporations to currency shocks. However, beneath these surface distinctions lies a core operational dynamic identical to the pre-1997 era: a massive expansion of bank credit directed primarily into real estate and land speculation, paired with risk-management practices that lag behind rapid asset inflation.
In the years before 1997, banks gave many low-cost loans for buildings, housing projects, and land development in Southeast Asia. Property values escalated rapidly because credit was abundant, rather than through real gains in economic productivity. When market demand naturally slowed down and borrowing costs adjusted, cash flows dried up, leaving financial institutions managing an unsustainable volume of stressed assets.
As one observes Nepal's urban centres today, the parallel feels familiar. Over the past decade, private sector credit has expanded at a rate that has consistently outpaced real Gross Domestic Product (GDP) growth, with domestic private sector credit reaching roughly 90.5 percent of GDP. A substantial proportion of this capital has migrated towards real estate, land plotting, and personal consumption loans rather than high-value manufacturing or export-oriented industries.
The NRB Macroeconomic Report (July 2026) also reports private sector credit of Nepal reached one of the highest ratios in Asia. The private sector credit to GDP ratio increased from 28.7% in 2000/01 to 46.6% in 2010/11, and then further climbed to 92% in 2025/26. As a percent of GDP, private-sector credit extended by the financial sector has breached 100 percent. This ratio is among the highest in Asian countries, reflecting a highly stretched financial system (World Bank, 2026a}
Nepal's banking sector is entering a more challenging phase as the Nepal Rastra Bank (NRB) enforces stricter supervisory standards, tighter loan classification rules, and higher provisioning requirements. These measures have exposed underlying weaknesses in asset quality that had been masked during the post-pandemic period. According to the NRB Macroeconomic Report (July 2026), the gross non-performing loan (NPL) ratio of banks and financial institutions increased sharply from 1.31% in mid-July 2022 to 5.60% by mid-April 2026. During the same period, watchlist loans also rose significantly, indicating that a growing share of bank credit remains vulnerable to default if economic conditions do not improve.
The deterioration in asset quality has begun to weigh on the banking system's financial strength. NRB supervisory data shows that total non-performing assets have exceeded Rs 250 billion, while several commercial banks have reported NPL ratios above 7-8%. Credit stress is particularly evident in real estate, construction, and wholesale trade, sectors that expanded rapidly during the credit boom. As banks increase provisions against bad loans, profitability and capital buffers come under pressure, reducing their ability to finance productive sectors and highlighting the need for prudent risk management and timely corrective action.
Crucially, the 1997 experience is not simply a narrative of economic setback – it is also a blueprint for how structural adjustments can restore stability. South Korea offers an instructive example of this resilience. In late 1997, faced with severe liquidity distress, Seoul accepted an IMF-led package and launched structural reforms. Authorities expanded the Korea Asset Management Corporation (KAMCO) to systematically buy non-performing loans from banks at fair market value. By removing bad debt from balance sheets, KAMCO unblocked financial channels, allowing banks to resume lending to productive global enterprises like Samsung, Hyundai, and LG. Similarly, Malaysia established Danaharta, a specialised national entity to manage troubled assets, which restored bank liquidity and stabilised the economy within two years. Sweden also adopted a similar strategy during its early-1990s banking crisis through state-backed asset management companies.
For the Nepalese market, waiting for financial friction to resolve itself is an approach the economy cannot afford. To safeguard public trust and stabilising financial indicators, Nepal Rastra Bank and the Ministry of Finance must immediately establish a dedicated, legally empowered National Asset Management Company (AMC) framework or similar financial tools. This specialized vehicle should be tasked with purchasing large, distressed real estate assets and non-performing loans from commercial banks at realistic, discounted valuations. By ring-fencing non-earning assets away from primary balance sheets, an AMC will free up frozen capital, reduce excessive provisioning burdens on commercial lenders, and ensure that liquidity flows smoothly back into priority economic sectors such as agriculture, hydropower, and domestic industry.
Furthermore, lasting resilience in the Nepalese financial sector requires an aggressive regulatory shift away from real-estate collateralised lending towards cash-flow-viable credit evaluation. The central bank should mandate modern credit-scoring systems and enforce strict debt-to-income (DTI) ratios. Simultaneously, bank consolidation must be driven by genuine risk-governance improvements and operational synergies rather than regulatory capital thresholds. By embracing structural transparency, establishing early resolution mechanisms, and shifting capital towards productive investments, Nepal can turn its current banking headwinds into a solid foundation for sustainable, long-term economic growth.