KATHMANDU, Sept 24: Risks in the loan portfolios of microfinance institutions are increasing. According to Nepal Rastra Bank, nonperforming loans at these institutions have reached nearly Rs 51 billion as loan quality has declined.
The central bank’s 2026 Offsite Supervision Report on Microfinance Financial Institutions says nonperforming loans grew by 63.83 percent in one year. The growth rate was more than double that of the previous year.
Nonperforming loans have grown far faster than total lending. The report says they rose from Rs 31.02 billion on July 16, 2025, to Rs 50.82 billion on July 15, 2026, an increase it puts at 63.63 percent.
The decline in loan quality relative to lending growth is considered a major challenge for the microfinance sector. During the review period, microfinance institutions extended Rs 487.73 billion in loans, up 10.09 percent from the previous year.
As nonperforming loans rose alongside lending, the amount institutions had to set aside for potential loan losses also increased. By July 15, 2026, total loan loss provisions had risen by 34.88 percent to Rs 35.24 billion. Within that total, provisions against nonperforming loans grew by 84.08 percent to Rs 29.42 billion.
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The report cites social obstacles to loan recovery, borrowers taking multiple loans, a sluggish economy and pressure on borrowers’ repayment capacity as reasons for the rise in nonperforming loans. Nepal Rastra Bank says microfinance institutions have succeeded in expanding lending but face a growing challenge in maintaining loan quality.
A loan becomes nonperforming when its principal or interest is not paid on schedule. Generally, a loan is classified as nonperforming when principal or interest remains unpaid for more than 90 days. Rising nonperforming loans can put pressure on the financial health of banks and financial institutions. When loan recovery becomes difficult, institutions must set aside funds for possible losses, reducing the profit available for distribution.
An increase in nonperforming loans also puts pressure on an institution’s capital. If loans cannot be recovered, the quality of its assets deteriorates.
When money lent out does not return on time, liquidity management becomes more difficult. This can affect further lending and wider economic activity. If nonperforming loans continue to rise, investors, depositors and the market may lose confidence in financial institutions, putting their financial position at risk.
At the end of the previous fiscal year, on July 16, 2025, total loan loss provisions had increased by 30.71 percent, while provisions against nonperforming loans had risen by 19.94 percent. The latest figures show that microfinance institutions have substantially increased the funds they set aside to cover potential risks as bad loans have grown.
According to the report, agriculture accounts for the largest share of lending by microfinance institutions. By July 15, 2026, Rs 313.05 billion had been lent to the agricultural sector, which the report describes as 58.63 percent of total loans.
Service businesses accounted for 20.45 percent of lending, wholesale loans for 8.65 percent, household and small enterprises for 2.64 percent, and other sectors for 9.62 percent.
Total loans and advances issued by retail microfinance institutions rose by 10.09 percent between July 16, 2025, and July 15, 2026, reaching Rs 487.74 billion.
Despite pressure from bad loans, microfinance institutions’ net profit increased. It rose from Rs 7.28 billion on July 16, 2025, to Rs 10.78 billion on July 15, 2026. Two of the 48 operating retail microfinance institutions recorded net losses. According to the central bank’s report, the institutions earned Rs 63.09 billion in interest income and incurred Rs 28.27 billion in interest expenses.
Nepal Rastra Bank says the microfinance sector’s overall capital position is satisfactory. As of July 15, 2026, core capital stood at 11.40 percent of risk weighted assets, while total capital stood at 12.56 percent. Under the unified directives, microfinance institutions must maintain minimum core capital of 4 percent and total capital of 8 percent.
During the review period, the institutions’ total assets grew by 7.88 percent to Rs 655.42 billion. Risk weighted assets accounted for 91.26 percent of total assets, compared with 91.35 percent a year earlier. The institutions’ total investments fell by 6 percent to Rs 9.90 billion.
Investments in fixed deposits also declined, falling by 14.39 percent to Rs 7.19 billion. Microfinance institutions mobilised Rs 225.27 billion from savings and deposits and Rs 212.54 billion from external borrowing. Their total financial resources reached Rs 437.81 billion.
