KATHMANDU: Despite expectations of economic revitalization under the coalition government formed by two major political parties, Nepal’s economy shows no significant signs of improvement. Hopes for political stability driving economic reforms and reinvigorating the financial system remain unmet. Persistent challenges in government finance have hindered the expected rise in credit demand across banks and financial institutions, leaving the economy stagnant.
Although interest rates have dropped to single digits due to surplus liquidity in the banking sector, the anticipated boost in credit demand has not materialized. Economists highlight that even lower interest rates have failed to stimulate economic activities, underscoring the need for targeted reforms.
In the first three months of the current fiscal year (July–September), loans extended by banks and financial institutions increased by only NPR 128.65 billion (2.5%). This figure is marginally higher than the NPR 109.03 billion (2.3%) recorded during the same period last year. While loan expansion in these months reached NPR 14 billion in July, NPR 59 billion in August, and NPR 55 billion in September, experts argue that these figures fall short of expectations.
Deposits in banks and financial institutions rose by NPR 170 billion (2.6%) during the same period, slightly above the NPR 158.50 billion (2.8%) increase seen last year. This reflects a sluggish trend in credit flow, even compared to the previous fiscal year, which already faced minimal loan distribution.
Sunil KC, President of the Nepal Bankers Association, attributed the slow credit flow to reduced demand in the real estate and trade sectors. He noted, “Banks expected growth in these sectors, but credit demand remains subdued. Additionally, issues in recovering old loans have led to rising bad debts in the banking sector.” Efforts to introduce new products and expand loans in areas such as housing and margin lending continue, but with limited success.
Former Finance Secretary and Chairman of the High-Level Economic Reform Advisory Commission, Rameshwar Khanal, emphasized that several factors contribute to this stagnation. “The construction sector has slowed, informal economic activities are expanding, and borrowers lack the capacity to take on additional loans. This has suppressed credit demand across the economy,” Khanal explained.
He also raised concerns about the potential growth of the informal economy, as evident from reduced trucking activities and impacted construction sectors. “Although bustling markets suggest economic activity, these may primarily reflect informal economic growth,” he added.
Experts stress the need for revitalizing the housing and real estate sectors to resolve the ongoing liquidity crisis. They recommend creating favorable conditions for property sales to enable borrowers to repay existing loans and seek new credit.
Challenges in cooperatives have further exacerbated the situation, with individuals struggling to recover their deposits. This, in turn, has weakened their borrowing capacity. “Depositors are unable to retrieve funds from cooperatives, leading to a decline in their ability to take loans,” Khanal noted, calling for urgent reforms to address this issue.
The Nepal Rastra Bank (NRB) introduced a monetary policy with an ambitious 12.5% credit expansion target for the current fiscal year, incorporating measures to boost the economy. These included reducing loan provisioning limits, encouraging sector-specific loans, and introducing flexible guidelines for non-collateralized loans in foreign employment. However, recent data reveal that credit expansion remains minimal, questioning the feasibility of meeting NRB’s goals.
For banks and financial institutions to achieve NRB’s target, an additional NPR 654.75 billion in loans must be disbursed this fiscal year. Last year, despite a target of 11.5%, only 7% of loans (NPR 344.72 billion) were distributed.
Economists suggest the government address structural issues in the economy, including resolving payment delays in the construction sector and tackling problems in cooperatives. “The government can stimulate the economy by paying dues to contractors and resolving cooperative crises,” said economist Kalpana Khanal.
Amid global and local economic uncertainties, Nepal’s private sector remains hesitant to increase investments. The Federation of Nepalese Chambers of Commerce and Industry (FNCCI) emphasized the importance of creating a business-friendly environment to build private sector confidence. FNCCI President Chandra Prasad Dhakal noted, “Policies like working capital loan guidelines have restricted businesses from securing additional loans. Flexibility in these policies could encourage industries to expand.”
With the government targeting 6% economic growth this year, projections by the World Bank (5.1%) and the Asian Development Bank (4.9%) indicate potential shortfalls. Analysts stress that without urgent government interventions, achieving the targeted growth rate may remain elusive.
Nepal’s economy faces mounting pressure to balance financial stability and foster economic growth. Experts call for coordinated efforts to address policy bottlenecks, revive key sectors, and enhance the overall investment climate in the country.