meraj - When one gets asylum status at a host country, the host country has in effect granted them the temporary relief from the threat of deportation. But legally they are still citizens of their home country. Compare that with green card holders, where the host country has granted them the right to settle/work in their country. Is there a reason why there would be a conflict of interest only in the first case and not in the second case?

The way I see it, as long as they are citizens of Nepal, there is no conflict of interest in granting them passports. If new laws are needed, that would be for dual citizenship. The asylee case is one with single citizenship which is well within existing laws.