What went wrong with NIC Asia Bank?

At its zenith, NIC Asia Bank looked as indomitable as a Himalayan peak. From 2013 to 2023, it expanded loans at a torrid 24% a year on average. Deposits poured in near lockstep. Net profit swelled by 20% year after year, delighting shareholders and outpacing rivals. Return on equity lingered above 15%, putting it among the world’s most profitable banks. 

Yet as Everest can humble even the fittest, so has NIC Asia’s meteoric rise been cruelly reversed. Profits have all but evaporated; rotten loans are stacking up troublingly high; and depositors seem to be voting with their feet. What precisely caused the bank’s fall from grace?

The story begins in the boom years. NIC Asia’s explosion was built on a high-octane model: bet big on retail and wholesale sectors, which accounted for roughly 60% of its loan portfolio. These segments promised juicy yields but also carried supreme risks when exposed to economic shocks. In the race for growth, moreover, diligence took a back seat. Whereas some competitors nurtured conservative loan portfolios, NIC Asia embraced the enthusiasm of a gambler on a hot streak, its appetite whetted by a period of consumer buoyancy and business optimism. For a while, even the skeptics were silenced: non-performing loans (NPLs) sat under 1%, becoming a benchmark for the industry.

But when the economic tide receded, its model turned from lucrative to lethal. To paraphrase Warren Buffett, when the economic tide goes out, you discover who has been swimming naked. By the third quarter of 2024, the bank’s NPLs—the proportion of loans classified as in or near default—shot up to 3.08%, and have since rocketed to 5.75%. Net profit in the latest third quarter collapsed 88% quarter on quarter to a paltry NRs 5 million, the lowest among all banks. For context, the bank had once posted quarterly profits as high as NRs 1.7 billion. Its over-concentration to volatile sectors echoes the demise of India’s Yes Bank, which collapsed spectacularly in 2020 after its excessive exposure to corporate lending left it vulnerable to economic gyrations.

During the boom years, NIC Asia also neglected to build stable, non-interest income streams—the financial equivalent of a balanced diet—causing its non-interest revenue to tumble from over a quarter to under 19% of total revenue. This reduction deprived the bank of a vital shock absorber when lending margins compressed.

At the same time, its CASA (current and savings account) ratio—a measure of cheap, sticky deposits—persistently lagged behind rivals. Forced to rely heavily on expensive time deposits (which are fickle), the bank’s funding costs ballooned as interest rates soared, squeezing margins further.

Making matters worse, until 2023 provisioning rules for loan losses imposed by the Nepal Rastra Bank were startlingly lax. Banks could classify loans as “standard” (that is, not at risk of default) even 90 days past due, as opposed to India’s 30-day threshold, for example. This let NIC Asia delay recognizing bad loans until the problems became uncontainable. During COVID the NRB even relaxed capital adequacy requirements, making banks unprepared for future troubles. Similar leniency in part enabled the Sri Lankan banking crisis in 2022. No wonder, the IMF has flagged Nepal’s "weak supervisory enforcement" as a core systemic risk.

For shareholders, the consequences are dire. The bank’s return on equity and assets has turned negative, a horror show for an institution once feted for profitability. In the third quarter alone, it wrote off NRs 1.06 billion in unrecoverable loans—nearly ten times the prior quarter’s figure—and set aside NRs 3 billion in provisions for future losses. Troubling still is that its Tier 1 capital—meant to absorb losses without needing outside help and reassure depositors—is on edge, at 9.05%, uncomfortably close to the regulatory minimum of 8.5%. One more rough quarter could trigger a capital shortfall. Because of its sinking capital buffer, the bank suspended its dividend last year, alienating institutional investors who had long touted the bank as a growth darling.

Depositors meanwhile are fleeing. Its deposits are down 10% year on year. Confidence, as they say, is earned in drops and lost in buckets. And NIC Asia is hemorrhaging trust. It is no coincidence that its stock has plummeted 29% over the previous six months, whereas the broader NEPSE index has gained 5%. As former NRB Governor Dr. Chiranjibi Nepal said, “This crisis was predictable. We’ve seen this pattern before. Banks grow recklessly, regulators delay action and taxpayers bear the cost.” 

Global comparisons provide a sobering warning. NIC Asia’s mismanagement of interest-rate risk mirrors the downfall of Silicon Valley Bank in the U.S., which collapsed after a $42 billion deposit exodus provoked by sudden losses on long-term bonds. Like SVB, NIC Asia failed to hedge against surging rates. 

Nobel laureate Robert Shiller’s theory of "narrative economics" is instructive here: that once the story of strength breaks, fear takes over, becoming a self-fulfilling prophecy. The banking sector operates on the fractional-reserve model: meaning most deposited cash is lent out, banking on the assumption that not everyone will ask for their money back simultaneously. That model collapses spectacularly when trust is lost. Even the mightiest can fall fast.

NIC Asia is now running against time—and it is losing. The bank that soared on confidence is now grounded by its own hubris. In Nepal’s banking, as in the stock market, the bank’s fall is a reminder: that what goes up fast can fall faster still.