What it is
Not every loan comes back. Banks estimate how much they may lose and set that aside as a provision. The change in that provision during the period is the impairment charge, and it comes straight out of profit.
NRB sets minimum provisions by loan class: pass 1% (since the half-yearly monetary policy review of FY 2081/82, Falgun 2081), watch list 5%, substandard 25%, doubtful 50%, loss 100%. NFRS 9 also requires an 'expected credit loss' estimate. The bank books the higher of the two.
When a bad loan is recovered or improves, provisions are released and this line can be negative (a 'write-back'), which boosts profit.
How it is calculated
Impairment charge = closing loan loss provision − opening provision + loans written off − recoveries of written-off loans. Reported as a single line for the period.
Worked on Nabil Bank Limited, FY 2082/83 Q4
NABIL's impairment charge for FY 2082/83 was Rs 267.72 crore, against net interest income of Rs 1,700.93 crore. Its gross NPL ratio was 4.20%.
What good looks like
Small relative to the loan book and stable. A rising charge means loan quality is worsening. A large write-back inflates one period's profit and will not repeat. Lower is better, but a bank that under-provisions is hiding losses, not avoiding them.
Watch out
- A negative charge (write-back) is one-off profit, not a sign of strength.
- Watch for Q4 spikes: year-end audits often force extra provisions.
- The provision rate for pass loans changes with NRB circulars (1.25% → 1.3% → 1.2% → 1.1% → 1% between 2021 and 2025); do not assume one fixed rate.
In Nepal
NRB loan classification and minimum provisions: pass 1% (cut from 1.1% in the half-yearly review of Monetary Policy FY 2081/82, Falgun 2081; 1.1% had replaced 1.2% at the start of that year), watch list 5%, substandard 25%, doubtful 50%, loss 100%. Since 2024 a regularised NPL moves to the watch list and its provision may be written back only after six months. NFRS 9 expected credit loss is fully effective from FY 2081/82 under NRB's ECL guidelines.
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- NRB circular for Monetary Policy FY 2081/82: pass loan provision 1.1% (superseded by 1% in Feb 2025), Sharesansar
- NRB loan categories and provisions (pass/watch list/substandard/doubtful/loss), Sharesansar
- NRB ECL Guidelines, first amendment (nrb.org.np)
Questions
Often because the impairment charge rose: more loans went into weaker categories, which required more provision.
It means some bad loans recovered, which is good. But it is a one-time gain and should not be counted on next year.