KATHMANDU: Nepal’s central bank, Nepal Rastra Bank (NRB), is falling short of its credit mobilization targets as the economy struggles to achieve expected growth. Despite setting a goal of increasing private sector lending by 12.5% in the current fiscal year, only about 4.16% credit growth has been recorded six months in.
The sluggish performance of key sectors, including construction, retail, and wholesale trade, has significantly impacted credit demand. The government had projected an ambitious 6% economic growth rate, but the Central Bureau of Statistics recently revised the growth estimate to just 3.4%.
One of the main bottlenecks is the underperformance of the agriculture sector, which accounts for 15% of total loans but has achieved only 3% growth. Conversely, the hydropower sector has shown a promising 22% growth, though its impact on broader economic activity has been limited.
NRB data reveals that as of mid-January, NPR 215 billion in loans has been disbursed, a slight improvement over the previous fiscal year’s mid-January figure of NPR 204 billion. However, bankers attribute much of this growth to interest capitalization, a practice that artificially inflates credit figures without corresponding economic activity.
The banking sector currently holds NPR 715 billion in surplus liquidity, yet investments remain stagnant. Lending rates have declined, with commercial banks’ average lending rates falling to 8.90% and deposit rates to 4.78%. NRB has reduced its policy rate to 5% to stimulate credit demand but with limited success.
While remittance inflows and reduced imports have strengthened foreign exchange reserves to USD 16.76 billion, covering 14.6 months of imports, the domestic economy continues to face contraction. The current account surplus stands at NPR 140 billion, and the balance of payments surplus is at NPR 225 billion.
Development banks and financial institutions are under increasing pressure. NRB recently took over the management of Karnali Development Bank, while Narayani Development Bank and Pokhara Finance are under heightened scrutiny. Rising non-performing loans, now exceeding 5%, have led to increased provisioning requirements, reducing profitability across the banking sector.
Several banks have struggled to distribute dividends, with four commercial banks deferring their annual general meetings due to financial difficulties. Despite positive signs in external accounts, the domestic economy’s sluggishness underscores the challenges facing NRB in achieving its credit mobilization goals.
The government and NRB are expected to introduce additional measures to stimulate economic activity, but experts warn that structural reforms are necessary to address the root causes of Nepal’s economic stagnation.