What it is
Every loan a bank holds is graded. The grade depends mainly on how many months the borrower is behind, and the grade decides how much the bank must set aside.
Pass: paying on time or less than three months late. Provision 1% of the outstanding principal (cut from 1.1% in the half-yearly review of FY 2081/82, Falgun 2081).
Watch list: still paying, but with warning signs such as cash-flow mismatch or a recently regularised loan. Provision 5%.
Substandard: three to six months overdue. Provision 25%. Doubtful: six months to one year. Provision 50%. Loss: over one year overdue, or otherwise unrecoverable. Provision 100%.
Substandard, doubtful and loss together are 'non-performing loans'. The provision for each is a cost in the income statement (impairment charge) and reduces the loan book on the balance sheet.
How it is calculated
Minimum provision = Outstanding loan × class rate (pass 1%, watch list 5%, substandard 25%, doubtful 50%, loss 100%). Banks book the higher of this and the NFRS 9 expected credit loss.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's gross NPL of 4.20% is the share of its loan book in the substandard, doubtful and loss classes. Its impairment charge of Rs 267.72 crore for the year is the cost of moving loans between classes.
What good looks like
Most of the book in pass, a small watch list, and NPL stable or falling. A growing watch list is the early warning: those loans are the next quarter's NPL candidates.
Watch out
- Restructured and rescheduled loans have their own rules and may sit outside NPL while the borrower struggles.
- The pass-loan rate has changed often (1.25%, 1.3%, 1.2%, 1.1%, now 1%); quote the current circular.
- Watch list is not NPL, but it already costs 5%.
- Collateral does not change the class; it may affect recovery, not the grade.
In Nepal
NRB Unified Directive No. 2 (loan classification and provisioning): pass up to 3 months overdue, substandard 3 to 6 months, doubtful 6 to 12 months, loss over 12 months; watch list introduced in 2015 at 5%. Pass provision cut from 1.2% to 1.1% by the circular implementing Monetary Policy FY 2081/82, then to 1% in the half-yearly review of that policy (Falgun 2081 / February 2025). Regularised NPLs move to the watch list and may be upgraded to pass, and provisions written back, only after six months. An NRB ECL guideline document still shows 1.25% for pass loans; Punji treats 1% as current per the Falgun 2081 review and flags the older figures in its notes.
Sources
- Banks to provide only 1 percent loss on good loans (Falgun 13, 2081), Kantipur
- NRB reduces provisioning on good loans to 1 percent from 1.10 percent (Feb 2025), Republica
- NRB adds watch list to loan categories (classes, overdue periods, provision rates), Sharesansar
- NRB circular implementing Monetary Policy FY 2081/82: pass provision 1.1% (superseded by 1% in Feb 2025), six-month watch list rule, Sharesansar
- NRB ECL Guidelines, first amendment (nrb.org.np)
Questions
When a payment is more than three months overdue. It is then substandard, and moves to doubtful at six months and loss at one year.
Loans that are still paying but show stress, or that were recently regularised after default. Banks must provision 5% on them.
Not the minimum class rate. Collateral helps recovery later, and it can affect the NFRS expected-loss estimate.