Credit Expansion of Banks Focused on Imports and Shares

After Nepal Rastra Bank (NRB) adopted a flexible monetary policy to promote sustainable domestic economic activities, the credit flow from banks and financial institutions increased, particularly in the import and stock markets.  

According to data published by NRB for the first two months of the current fiscal year, loans from banks grew by Rs 73.39 billion, reflecting a 1.4 percent increase. However, credit expansion to small and medium-sized enterprises (SMEs)—which are considered the backbone of the economy—and loans to the poor have declined, with growth in these sectors showing negative trends.  

As of mid-September in the current fiscal year, the highest credit expansion has been in imports. Bank loans for imports increased by 17 percent, compared to a 12.7 percent rise during the corresponding period of last fiscal year. Traders boosted imports of consumer goods in preparation for festivals such as Dashain and Tihar, further driving loan demand. Additionally, the low interest of banks has prompted businessmen to import more vehicles, resulting in increased lending for import purposes.  

Three years ago, when foreign exchange reserves had fallen to critical levels, NRB introduced a policy requiring a cash margin of 50% to 100% when opening letters of credit (LC) for imports, aiming to curb import-related credit. With the improvement in foreign exchange reserves, NRB has now removed this requirement. Business leaders had previously criticized the cash margin policy, and the International Monetary Fund (IMF) had also recommended its removal.  

Following the adoption of the flexible monetary policy, credit expansion has also been observed in the stock market. In the first two months of the current fiscal year, share mortgage loans from banks increased by 10.7 percent, compared to a growth of only 1.8 percent during the same period last fiscal year.  

Three years ago, NRB introduced limits on share mortgage loans, citing concerns that banks were allocating too much credit to unproductive sectors. Initially, individuals were allowed to borrow up to Rs 40 million from a financial institution and Rs 120 million from the entire financial system. Last year, the limit was raised to Rs 120 million for individual investors and Rs 200 million for institutional investors. The current fiscal year’s monetary policy removed the loan limits for institutional investors.  

The stock market has been rising steadily since June, following a power-sharing agreement between the two major political parties. In response, investors have increased their investments by taking out large loans from banks and financial institutions.  

Compared to the previous fiscal year, there has also been improvement in home loans, vehicle loans, and working capital loans up to Rs 20 million this year. With the monetary policy of fiscal year 2023/24, NRB raised the limit for first-time residential housing loans from Rs 15 million to Rs 20 million. Additionally, the risk burden for share mortgages, real estate, and hire-purchase loans was reduced. The implementation of current capital loan limits was extended by another year under this year’s monetary policy.  

Former Executive Director of NRB and economist Nar Bahadur Thapa stated that while the expansion of loans in sectors such as imports, real estate, and share mortgages does not pose the same risks as in the past, the negative credit growth in small and medium enterprises remains a concern. SMEs are crucial to the economy, and their lack of access to credit could hinder economic progress.