Britain should cut its 86 million pound ($128 million) aid budget for Nepal unless the country acts to combat poor governance and "endemic" corruption, a parliamentary committee said on Friday.

Britain is the largest bilateral donor to Nepal which is one of the world's poorest nations with a quarter of its 28 million population living below the poverty line, according to the World Bank.

Funding from Britain's development aid ministry, the Department for International Development (DFID), has helped Nepal make progress in health, water and sanitation in the nine years since it ended a decade-long civil war.

But this spending will only be justified if governance improves, according to the International Development Committee (IDC), a parliamentary committee that monitors the performance of DFID.

DFID should also address the needs of women and girls in Nepal, who are at risk of trafficking, early marriage, domestic abuse and murder, by working to change social norms and ensure justice for victims, the IDC said in a report.

"Nepal suffers from poor governance, and corruption is endemic," committee chairman Malcolm Bruce said in a statement.

"If Nepal is to become less corrupt, improvements in governance and a change of culture have to be made to state institutions."

Britain passed a bill earlier this month to commit to spending 0.7 percent of its gross national income on aid each year. It met the target for the first time last year - spending 11.4 billion pounds on overseas aid - making it the first G7 country to meet the U.N. target.

DFID's aid budget for Nepal increased to 86 million pounds in 2014/15 from 55.9 million pounds in 2012/13 for building roads, reforestation and disaster risk reduction.

But corruption is an concern in the Himalayan nation wedged between China and India. Nepal was ranked 126th out of 175 countries in watchdog Transparency International's global corruption perception index last year, down from 116 in 2013.

The committee said working with local non-governmental organizations instead of the state was not a solution, as both are "prone to corruption in a corrupt society".

The committee called on DFID to provide support for female members of parliament and parliamentary committees and back local elections through existing government programs to avoid further corruption.

It praised the aid ministry for providing technical support for plans to build two major hydro-electric schemes that aim to address Nepal's chronic power shortages.

"If traditional political problems are overcome and these schemes are successful, the Nepalese economy could be transformed and DFID could begin to develop an exit strategy," Bruce said.

In response to the IDC report, DFID said it had a zero tolerance approach towards corruption and that supporting girls and women was at the heart of its work.

"We are heavily involved in preventing gender-based violence by working with communities and the police, as well as tackling other barriers faced by women and girls through skills programs and reproductive health services," a DFID spokeswoman said in a statement.