Looking Back at 2025: Flexible Monetary Policy Fails to Ease Pressure on Banking Sector

The year 2025 proved challenging for Nepal’s banking and financial sector, as the lingering effects of the Covid-19 pandemic and the global economic slowdown continued to dampen economic activity, leaving the financial system under sustained pressure.

Despite the appointment of a new governor at Nepal Rastra Bank (NRB) and the adoption of a relatively accommodative monetary policy, structural problems within the banking system remained largely unresolved throughout the year.

Although excess liquidity persisted for most of the year, sluggish credit growth put pressure on bank profitability, investor returns and overall financial discipline. Political instability further compounded the situation, with campaigns promoting loan defaults gaining traction and exposing the banking sector to heightened risk.

Loan Default Campaigns and Security Concerns

One of the most sensitive developments during the year was the organised campaign by certain groups encouraging borrowers not to repay bank loans. The movement weakened financial discipline and, in some cases, escalated into physical attacks on bank staff attempting to recover dues.

The lack of action against those involved—allegedly due to political protection—created a climate of fear and insecurity within the banking sector.

Nepal Bankers’ Association President Santosh Koirala said such campaigns and attacks posed a serious threat to the country’s financial system.

“The most transparent and well-regulated sector in Nepal has come under organised attack,” he said. “The state must take this issue seriously and act decisively.”

Persistent Excess Liquidity

The banking system remained flush with liquidity throughout the year. Strong remittance inflows, coupled with relatively weak growth in foreign trade, subdued government spending and low private-sector credit demand, resulted in banks holding large volumes of idle funds.

Despite lending rates falling to around 5 percent, credit expansion failed to pick up as expected. As a result, the central bank continued issuing Nepal Rastra Bank bonds to absorb excess liquidity from the market.

NRB Spokesperson Guru Prasad Paudel described the situation as paradoxical, noting that credit growth remained weak despite ample liquidity and low interest rates. Business leaders, however, attributed the slowdown to an unfavourable political and investment climate.

New Governor, Accommodative Policy

Dr Bisho Nath Paudel was appointed as the 18th Governor of Nepal Rastra Bank during the year. While his background in public finance, economic policy and structural reform was widely viewed as positive, his appointment process was not free from controversy.

Initially a member of the governor recommendation committee, Paudel resigned mid-process and was later recommended as a candidate himself, raising questions over the credibility of the selection process. Following the Gen-Z movement, some groups even demanded his removal, alleging political affiliation.

After assuming office, Governor Paudel signalled a policy approach focused on “less regulation and stronger supervision.” He formed a task force to suggest reforms in the banking sector, indicating his intent to pursue systemic change.

Based on the task force’s recommendations, Paudel prioritised credit expansion, financial stability and the restoration of system-wide confidence in his first monetary policy. The 2025 monetary policy was made comparatively accommodative, with easing of the policy rate, bank rate and credit-to-deposit ratio to encourage lending to the private sector. This stance was maintained in the first quarterly review.

However, despite policy easing, economic activity failed to gain momentum.

Low Interest Rates, Sluggish Lending

Even as banks cut lending rates to record lows, credit growth remained weak. Sluggish loan expansion, falling interest margins and rising non-performing loans directly affected bank profitability.

The banking sector’s non-performing loan (NPL) ratio rose beyond 5 percent during the year. Amid concerns over the accuracy of reported figures, a loan portfolio review of 10 major commercial banks has been initiated in line with conditions set by the International Monetary Fund (IMF).

Questions Over Governance

Concerns over governance in the financial sector intensified after Karnali Development Bank was declared problematic earlier in the year. The situation raised serious questions about regulatory effectiveness, particularly after NRB officials involved in supervision were themselves implicated in irregularities.

Toward the end of the year, allegations of irregularities under police investigation at Prabhu Bank further dented confidence in corporate governance within the banking sector.