KATHMANDU: Nepal Rastra Bank’s annual supervision report has exposed commercial banks manipulating their Capital Adequacy Ratio (CAR) and miscalculating risk-weighted exposures to project an artificially strong financial position.

According to the report, banks have been intentionally understating their true risk profiles by misclassifying under-performing loans—including watch-list, substandard, doubtful, and bad loans—into lower-risk categories, while completely removing outstanding bank guarantee claims from their risk-weighted exposures.

Furthermore, institutions exploited loopholes in the ‘Regulatory Retail Portfolio’ by using a single-threshold criterion, failed to allocate sufficient loan loss provisions, and completely neglected their Internal Capital Adequacy Assessment Process (ICAAP) by skipping mandatory annual reviews and missing central bank deadlines.

Compounded by a severe lack of long-term capital planning, structural management policies, and clear safety buffers, banks have simply treated minimum regulatory baselines as their ultimate targets, a complacent trend that the central bank warns poses a severe threat to national financial stability.