KATHMANDU: Bankers in Nepal, who were optimistic about a surge in loan demand following the conclusion of major festivals such as Dashain and Tihar, have been left disheartened as the anticipated growth has failed to materialize. The construction sector, typically expected to drive economic activity during this period, has shown little movement, leading to disappointment across the banking sector. The subdued demand for loans has raised concerns about balance sheets and the overall economic recovery in the current fiscal year.
In the month of Mangsir (mid-November to mid-December), Nepal’s commercial banks collectively expanded their business by only NPR 42 billion. This growth falls significantly short of the NPR 80 billion bankers had projected for the post-festive season period. The underwhelming performance has intensified fears that the economy may not rebound as quickly as hoped, especially in sectors critical for job creation and infrastructure development.
Loan disbursement trends in recent months had initially provided some hope for recovery. In Shrawan (mid-July to mid-August), loans increased by NPR 2 billion, followed by NPR 53 billion in Bhadra (mid-August to mid-September) and NPR 56 billion in Ashoj (mid-September to mid-October). However, the trend reversed in Kartik (mid-October to mid-November), with loan disbursement contracting by NPR 2 billion. This marked the first decline in several months, further dampening confidence among bankers.
Everest Bank CEO Sudesh Khaling expressed his disappointment at the sluggish demand for loans, which he had expected to rise significantly after the festive season. He noted that declining interest rates and the conclusion of holidays should have created favorable conditions for borrowing, but the reality has not aligned with these expectations. Khaling explained that while some sectors, such as hydropower, have continued to see disbursements based on pre-approved loans, demand from other industries remains negligible.
The hydropower sector accounted for the bulk of loan disbursements in Mangsir, reflecting earlier commitments by banks to fund ongoing projects. However, this concentration of lending activity has highlighted the lack of diversification in loan demand. Many other sectors, including manufacturing, retail, and agriculture, have failed to generate significant borrowing activity, exacerbating concerns about the overall health of the economy.
While 14 of Nepal’s 20 commercial banks managed to expand their businesses during Mangsir, six banks reported a contraction in loan portfolios. Everest Bank led the industry in loan disbursement, with NPR 7.79 billion allocated during the month. However, even this bank has only managed to invest NPR 18.5 billion in the first five months of the current fiscal year, reflecting the broader challenges faced by the industry.
Other significant contributors to loan disbursement in Mangsir included Rastriya Banijya Bank, which lent NPR 6.53 billion; NMB Bank, with NPR 5.79 billion; Global IME Bank, with NPR 5.67 billion; and Prime Commercial Bank, which disbursed NPR 4.41 billion. At the other end of the spectrum, Himalayan Bank reported the lowest loan disbursement during the month, at just NPR 900 million.
The contraction in loan portfolios has been particularly pronounced at NIC Asia Bank, which saw its loans shrink by NPR 4.24 billion in Mangsir. Over the past five months, the bank’s total business has declined by NPR 27.97 billion, reflecting a broader struggle to attract and retain borrowers. Arjan Khaniya, Deputy CEO of NIC Asia Bank, attributed the contraction to an increase in non-performing loans (NPLs), which has forced the bank to focus on recovery efforts rather than pursuing new business.
Khaniya explained that while liquidity remains ample, capital adequacy pressures have limited the bank’s ability to expand its portfolio. He emphasized that the current focus on recovery is necessary to maintain financial stability, even if it comes at the expense of short-term growth.
Despite the challenges in loan disbursement, commercial banks saw a net increase of NPR 33 billion in deposits during Mangsir. This growth in deposits was driven primarily by Rastriya Banijya Bank, which accounted for 64.48% of the total increase, with NPR 21.48 billion in new deposits. The influx of funds into the banking system reflects a lack of investment opportunities, as businesses and individuals remain hesitant to borrow or spend.
Rastriya Banijya Bank CEO Devendra Raman Khanal noted that the continued decline in interest rates has not translated into increased loan demand, as many potential borrowers remain cautious about the economic outlook. Khanal explained that the bank has been reducing deposit interest rates in response to the lack of demand for loans, but funds have continued to flow into the system.
Among the 20 commercial banks, 12 reported an increase in deposits during Mangsir, while eight experienced a decline. Nepal Bank saw the largest increase in deposits, adding NPR 11.31 billion, followed by Nepal Investment Mega Bank with NPR 9.33 billion and Nabil Bank with NPR 7.65 billion.
NIC Asia Bank, however, reported the steepest decline in deposits, with a reduction of NPR 11.43 billion during the month. Other banks that experienced a contraction in deposits included Agricultural Development Bank, Himalayan Bank, Kumari Bank, Machhapuchhre Bank, Nepal SBI Bank, NMB Bank, and Standard Chartered Bank.
The stagnation in loan demand and the accumulation of deposits have created a challenging environment for Nepal’s banking sector. Many banks are now grappling with excess liquidity, which has resulted in rising operational costs and shrinking profit margins. The lack of viable investment opportunities has further compounded these challenges, raising concerns about the long-term sustainability of the industry.
Bankers have called for targeted policy interventions to address the underlying issues affecting loan demand. They have emphasized the need for measures to stimulate economic activity in key sectors, including construction, manufacturing, and retail, which have traditionally been drivers of growth.
At the same time, the banking sector is facing increasing scrutiny over its ability to adapt to changing economic conditions. Critics have argued that the industry’s reliance on a few key sectors, such as hydropower, has left it vulnerable to external shocks and limited its capacity to support broader economic development.
As the fiscal year progresses, the performance of Nepal’s banking sector will be closely watched as a barometer of the country’s economic recovery. Bankers remain hopeful that demand for loans will pick up in the coming months, but the road ahead is fraught with uncertainty. The challenges facing the industry underscore the need for concerted efforts to address structural issues and create an environment conducive to sustainable growth.
For now, the banking sector remains caught between excess liquidity and weak demand, highlighting the complex and interrelated challenges facing Nepal’s economy. Without meaningful progress in addressing these issues, the prospects for a robust recovery remain uncertain.