Lending Slows as Banks Prioritize Recovery Over Credit Expansion

Nepal Rastra Bank (NRB) has stated that credit expansion has slowed due to banks' reluctance to lend amid rising non-performing loans and sluggish economic activities dampening credit demand.

The central bank’s monetary policy for the current fiscal year 2025/26 had projected private sector credit growth of 12 percent. However, year-on-year data up to mid-January 2025 shows an increase of only 6.7 percent. Between mid-July and mid-January of the current fiscal year, deposits at banks and financial institutions (BFIs) grew by 5.7 percent (Rs 417.48 billion), while credit to the private sector increased by only 3.6 percent (Rs 197.47 billion).

BFIs currently possess investable funds totaling Rs 1200 billion. Although banks are permitted to extend loans up to a credit-deposit (CD) ratio of 90 percent, the current ratio stands at 74.40 percent.

According to a recent macroeconomic report published by NRB last week, banks are under capital pressure due to high non-performing loans (NPLs) and non-banking assets. Consequently, they are focusing on recovery and risk management rather than credit expansion. The report also flagged decline in business confidence and private sector’s lack of willingness to invest.

The report highlights that increasing NPLs across BFIs have inflated their non-banking assets, putting pressure on their capital position and profitability. As of mid-January 2025, the average NPL ratio of BFIs stood at 5.42 percent, with commercial banks alone reporting 5.26 percent. Similarly, the total non-banking assets of BFIs reached Rs 51.28 billion. The rise in NPLs and non-banking assets has left some banks unable to maintain required capital adequacy ratios, restricting their capacity for further lending.

The central bank report identifies a significant increase in the number of individuals and companies on the credit information blacklist as a key factor weakening the demand side of lending. Legal provisions deem blacklisted individuals ineligible for new loans.

In response, the mid-term review of the current monetary policy includes provisions to prevent borrowers who cannot immediately settle debts due to circumstantial reasons from being blacklisted. It also mandates effective implementation of existing rules allowing BFIs to remove defaulters from the blacklist for up to six months for recovery purposes if they provide valid reasons for repayment.

Dr. Ramsharan Kharel, Executive Director of the NRB Research Department, stated that despite ample market liquidity and low interest rates, a flexible policy for credit expansion is in place. He noted the slowdown in economic activities has dampened overall demand, weakened business confidence, and reduced the private sector's appetite for investment.

The NRB report also pointed to low government capital expenditure as another reason for sluggish credit demand. It mentions that a decline in both imports and production in the previous year has led to reduced aggregate demand, the effects of which continue to linger. Furthermore, the central bank suggested that the 'Gen-Z' movement in September 2025 may have further weakened the short-term investment climate.

Dr. Kharel remarked that despite a balanced monetary policy, sufficient liquidity, and low interest rates, credit investment has failed to pick up pace. He added that future credit expansion will depend on the policies of the government formed after the elections and the resulting investment climate it creates. "For this, however, the formation of a stable government and further improvement in the investment-friendly environment are necessary," he said.