Loans and advances are the major sources of income for bank and financial institutions. Though loans and advances are the prime income sources, they are also the major sources of risk. If the customer defaults, then loans becomes the greatest sources of financial losses even resulting to bank failure.

Nepal Rastra Bank has classified loans into two headings:
  1. Performing loan
  2. Non-performing loan. 

Performing loan are those loans whose principal and interest payment are not due or less than of 90 days. Non-performing loans are those loans whose principal and interest payment are due for more than 90 days. Performing loan includes pass loans and watch-list loans, while non-performing loan includes substandard, doubtful and bad debts.

Current Loan Classification and Provisioning

Loan Classification and Provisioning in Nepalese Bank

  1.     Pass Loans that have been restructured will have loan provision of 12.5 percent.
  2.     Unsecured loans have provision of 25 percent or more.

Criteria of being watch-list loan
  1.     If the interest has not been paid for one month due against principal.
  2.     If the borrower has not cleared loan amount in any other financial institution.
  3.     If the temporary restructuring of the loans have been made.