Capital Adequacy and Prudential Requirements
Nepal runs two capital regimes at once, and a class A commercial bank is managed to 11 per cent total capital and 8.5 per cent core capital.
Two capital frameworks
The single most common error in analysis of Nepali bank capital is treating the sector as one regime. It is two.
Class A commercial banks, and national-level class B development banks, are on the Capital Adequacy Framework 2015, a Basel III-derived framework that NRB began implementing from mid-July 2016, with a parallel run from mid-January 2016 and full phase-in by mid-July 2019. Class C finance companies and class B development banks licensed for a limited number of districts remain on the earlier framework of 2007/2008, which is Basel II in structure.
A capital adequacy ratio published for a finance company and one published for a commercial bank are therefore not measuring the same thing, and a system-wide average blends them. Any cross-class comparison needs that caveat attached.
What follows describes the 2015 framework, because it governs the institutions a foreign counterparty is likely to be dealing with.
Minimum capital ratios
| Component | Requirement | Quality of capital |
|---|---|---|
| Common equity Tier 1 | 4.5% of risk-weighted assets | CET1 only |
| Tier 1 capital | 6.0% of RWA | CET1 plus additional Tier 1 |
| Total capital | 8.5% of RWA | Tier 1 plus Tier 2 |
| Capital conservation buffer | 2.5% of RWA | CET1 only |
| Countercyclical buffer | 0% to 2.5% of RWA | CET1 only |
| Tier 1 leverage ratio | 4% | Tier 1 against exposure measure |
The Pillar 1 minima are 8.5% total and 6.0% Tier 1. The capital conservation buffer sits on top and must be met with common equity. NRB’s own supervision reporting states the operative figures as 11% capital adequacy and 8.5% core capital, and that is what a bank is managed to.
The buffer is not a hard floor. A bank whose CET1 falls into the buffer range keeps operating but faces graduated restrictions on distributions, running from full retention of earnings at the bottom of the range to no restriction once CET1 exceeds 7.0%. Retail investors hold most bank equity in Nepal, and cash dividends and bonus shares are closely watched. The distribution restriction is the sharp end of the framework.
The countercyclical buffer is defined by reference to the credit-to-GDP gap. It activates when the gap exceeds 5 percentage points, adding 0.5% for each further percentage point up to the 2.5% cap. NRB has kept it at zero. Private credit in Nepal runs above 90% of GDP, so the fact that the buffer has never been switched on is itself a policy statement.
Risk-weighted assets
Nepal uses the Simplified Standardised Approach for credit risk. There are no internal ratings-based models and no bank-specific risk weights derived from a bank’s own default history. Exposures fall into fixed categories:
- 0% for claims on the Government of Nepal and Nepal Rastra Bank
- 20% for claims on domestic banks meeting capital adequacy, and certain foreign claims
- 60% for fully secured residential mortgages
- 75% for the regulatory retail portfolio, subject to granularity and value tests
- 100% for corporate claims, commercial real estate and unlisted equity
- 150% for past-due loans other than residential mortgages, and for high-risk investments
Off-balance-sheet items convert at weights running from 0% for unconditionally cancellable commitments to 200% for unpaid claims under guarantees.
Two consequences follow for anyone modelling a Nepali bank. The 150% weight on past-due loans means asset quality feeds into capital twice: once through provisions charged against earnings, and again through risk-weighted assets. A rise in the non-performing ratio compresses the capital ratio from both directions. And because the weights are fixed, NRB can and does change them as a policy lever. Circular No. 8 of 15 December 2025 cut the trust receipt loan weight from 120% to 100% and introduced rating-based weights for domestic public sector entities with a 50% floor, releasing capital for trade finance without any bank changing its balance sheet.
On the capital side, Tier 2 includes subordinated debt, longer-dated preference shares, hybrid instruments, general loan loss provisions capped at 1.25% of credit risk-weighted exposures, and half of revaluation reserves subject to a further cap. Tier 2 in total may not exceed Tier 1 after deductions. Additional Tier 1 instruments must absorb loss by conversion or write-down at a CET1 trigger of 5.125%.
Above Pillar 1 sits an ICAAP obligation on each bank and a Supervisory Review and Evaluation Process at NRB, which can impose an institution-specific add-on where the supervisor judges risk management inadequate or concentrations excessive. That add-on is not published, so a reported ratio of 11.5% does not by itself establish that a bank is comfortably above its own requirement.
Where the sector stands
| Date | Total capital adequacy | Core capital |
|---|---|---|
| Mid-July 2025 | 12.95% | 10.13% |
| Mid-January 2026 | 12.49% | 9.48% |
| Mid-April 2026 | 12.62% | 9.72% |
By class at mid-July 2025, commercial banks reported 12.90%, development banks 13.34% and finance companies 13.93%, the last two on the older framework. Commercial banks’ leverage ratio was 6.46% against the 4% minimum.
The headroom above 11% looks adequate, and it is thinner than it reads. Core capital at 9.48% in January 2026 sat barely a point above the 8.5% requirement, and core capital is the constraint that binds first, because Tier 2 capacity is capped by Tier 1.
The IMF reported a capital adequacy ratio of about 11.1% for the second quarter of FY 2025/26 against NRB’s 12.49% for essentially the same period. The basis for the difference was not established, and both figures are published.
The loan portfolio review
Under Nepal’s Extended Credit Facility arrangement, NRB commissioned an independent loan portfolio review of the ten largest commercial banks. The review applied existing NRB requirements together with international practice and identified reclassification and additional provisioning needs. For at least some banks, in other words, the reported capital ratios above were overstated.
The remedy is a two-phase capital restoration path: banks must first reach 8.5% total capital and 6% Tier 1, then 11% total capital and 8.5% Tier 1. Capital Restoration Plans and NPL Resolution Strategies were required by mid-August 2026, with NRB review targeted for mid-September 2026.
The sequencing rewards a close reading. Phase one is the Pillar 1 minimum without the conservation buffer. NRB is allowing affected banks to sit inside the buffer, with the distribution restrictions that implies, while they rebuild, rather than treating a buffer breach as a breach of requirement. That is orthodox buffer mechanics, and it is the first time it has been used at scale in Nepal.
Outside the framework
Minimum paid-up capital is a separate requirement from the risk-based ratio. BAFIA section 41 leaves the figure to NRB, which sets it by circular. The current amounts by class could not be confirmed from a primary source and are not stated here. An institution can satisfy the capital adequacy ratio and still be short of the paid-up capital floor, and the 2015 increase in that floor drove most of the merger wave described in Licensing, Ownership, Consolidation and Resolution of Nepali Banks.
Market and operational risk capital charges exist under the framework but are small relative to credit risk in a system where trading books are negligible.
The provisioning interaction runs the other way to most markets. Because general provisions on performing loans count in Tier 2 up to a cap, a change in the pass-loan provisioning rate — cut from 1.2% to 1.0% in the Monetary Policy for 2025/26 — moves both earnings and regulatory capital. That link is set out in Asset Classification, Provisioning and Non-Performing Loans.
Sources
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Capital Adequacy Framework 2015 (Updated July 2015), issued with Circular 11
Nepal Rastra Bank, Banks and Financial Institutions Regulation Department · 2015; implementation from mid-July 2016, fully phased in by mid-July 2019 · Tier 1 — Primary legal instrument
Supports: CET1 4.5%, Tier 1 6.0% and total capital 8.5% of risk-weighted assets; the 2.5% capital conservation buffer in CET1; the countercyclical buffer range of 0–2.5% and its credit-to-GDP gap trigger; definitions of CET1, additional Tier 1 and Tier 2 and the Tier 2 cap; the Simplified Standardised Approach and its risk weights; the 4% Tier 1 leverage ratio; and the ICAAP and supervisory review architecture.
Accessed 26 August 2026
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Financial Stability Report, Issue No. 17
Nepal Rastra Bank · Published July 2026; data to mid-July 2025 · Tier 2 — Official publication
Supports: Sector capital adequacy of 12.95% and core capital of 10.13% at mid-July 2025, capital adequacy by class, the commercial bank leverage ratio of 6.46% against the 4% minimum, and net liquid assets at 34.33% of deposits.
Accessed 26 August 2026
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Key Financial Indicators, Poush end 2082 (mid-January 2026)
Nepal Rastra Bank · Published 23 March 2026; data to mid-January 2026 · Tier 2 — Official publication
Supports: Commercial bank capital adequacy of 12.49% and core capital of 9.48% at mid-January 2026, and the credit-to-deposit ratio of 73.08%.
Accessed 26 August 2026
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2082 Chait (Mid-April 2026) Banking and Financial Statistics (Monthly)
Nepal Rastra Bank · Data to mid-April 2026 · Tier 2 — Official publication
Supports: Core capital to risk-weighted assets of 9.72% and total capital of 12.62% at mid-April 2026.
Accessed 26 August 2026
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International Monetary Fund · 8 June 2026 · Tier 3 — Multilateral institution
Supports: The two-phase capital restoration targets of 8.5% CAR with 6% Tier 1 and then 11% CAR with 8.5% Tier 1; the mid-August 2026 deadline for Capital Restoration Plans; and the reported capital adequacy ratio of about 11.1% in Q2 FY2025/26.
Accessed 26 August 2026
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Nepal Rastra Bank · 11 July 2025 · Tier 1 — Primary legal instrument
Supports: The statement that the countercyclical capital buffer requirement for 2024/25 was set at zero percent, the policy rate of 4.5%, and the reduction of the loan loss provision on pass loans to 1.0%.
Accessed 26 August 2026
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Flash Alert on Circular No. 08/082/83
PKF T R Upadhya and Co. · Circular dated 15 December 2025 · Tier 6 — Professional or news source
Supports: The reduction of the risk weight on trust receipt loans from 120% to 100% and the introduction of rating-based risk weights for domestic public sector entities, with a 50% floor.
Accessed 26 August 2026
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Bank Supervision Report 2022/23
Nepal Rastra Bank, Bank Supervision Department · April 2024 · Tier 2 — Official publication
Supports: That NRB states the minimum core capital ratio as 8.5% and the minimum capital adequacy ratio as 11% for commercial banks, and the operation of the SREP and ICAAP process.
Accessed 26 August 2026
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