After the opening of commercial banks under joint investment in Nepal since 2041 B.S. (1984 A.D.), economic activities began to accelerate. Especially from fiscal year 2048/049 onwards, with the establishment of additional banks and financial institutions, there has been a significant increase in banking sector investment.

As of the end of Ashadh 2064 B.S., there were 23 commercial banks, 73 “Class C” finance companies authorized for limited banking transactions, 12 “Class D” microcredit development banks, and 19 cooperatives operating with approval from Nepal Rastra Bank (NRB). In addition, 47 non-governmental organizations were licensed by NRB to conduct only microcredit operations in various parts of the country.

In recent years, as a consequence of national conflict, there has been a slowdown in productive activities and the beginning of capital flight, leading to an increase in non-performing loans (NPLs) among banks and financial institutions. It has been observed that in Nepal, the volume of non-performing loans has rapidly increased in recent years, reaching nearly 25 percent of total loans.

If the proportion of such non-performing loans exceeds 10 percent of the total loan portfolio, it adversely affects the liquidity, income, and profitability of banks and financial institutions, as well as government tax revenues. Hence, non-performing loans are considered detrimental to both the financial institutions and the overall financial health of the nation.

According to a study conducted by the World Bank, non-performing loans in Nepal"s banking sector have reached around 7 percent of the country"s gross domestic product (GDP) and are alarmingly rising. As per the directives of Nepal Rastra Bank, all non-performing loans are not necessarily bad loans, nor are all bad loans completely irrecoverable. Banks and financial institutions, based on their own accounting policies, may write off certain loans from their books, but they are still required to continue recovery efforts. In practice, such efforts are indeed ongoing, though recovering such loans is often difficult.

If effective measures are not promptly taken to reduce this growing problem of non-performing loans, the financial condition of the country will deteriorate and could lead to the collapse of the entire economy. Therefore, in order to ensure the prompt initiation and settlement of cases relating to loan recovery and to facilitate the collection of principal and interest owed by debtors, the Bank and Financial Institution Debt Recovery Act, 2058 (2002) and the corresponding Regulation, 2059 (2003) were promulgated. Pursuant to these, the Government of Nepal, by publishing a notice in the Nepal Gazette, established the Debt Recovery Tribunal effective from 1 Shrawan 2060 B.S. (July 17, 2003).

The primary objective of the Tribunal is to ensure speedy proceedings and resolution of loan recovery cases related to the banks and financial institutions designated by the Nepal Rastra Bank and thereby facilitate the recovery of non-performing loans within the financial sector. The Tribunal is currently functioning in Kathmandu.

Expected Positive Impacts of the Tribunal on the Financial Sector

It is expected that the establishment of the Tribunal will have both direct and indirect positive impacts on the nation"s financial sector, as follows:

(a) Quick and simplified resolution of problems arising in the adjudication of loan recovery cases of banks and financial institutions,
(b) Reduction in the percentage of non-performing loans,
(c) Expeditious proceedings and disposal of loan recovery cases,
(d) Improvement in credit administration efficiency, thereby enhancing the overall efficiency of the financial sector and consequently increasing its contribution to the government"s revenue.