KATHMANDU: Nepal’s banking sector faces increasing difficulties with credit expansion and recovery, even as interest rates decline and the gap between credit and deposit interest rates narrows. Bankers warn that these challenges could have far-reaching implications for the country’s financial stability and economic growth.**
At a press conference organized by the Nepal Bankers’ Association (NBA) on Tuesday, financial experts highlighted the pressing need for policy flexibility to support the sector. Anil Sharma, CEO of the NBA, presented a working paper emphasizing that prolonged liquidity surpluses in the financial system have done little to alleviate the challenges of credit expansion. With the spread rate narrowing, banks are finding it increasingly difficult to extend loans.
Surendra Raj Regmi, Vice President of the NBA and CEO of Global IME Bank, highlighted the rigidity of regulatory policies as a significant obstacle. Nepal’s banks, he explained, maintain capital adequacy ratios that are 2-3 percentage points higher than international standards. Regmi argued that, in these challenging times, Nepal Rastra Bank (NRB) should introduce more flexible policies to ease the burden on financial institutions. “We are already surpassing global benchmarks for capital adequacy. Given the circumstances, NRB must provide regulatory relief to ensure the sector remains stable,” he said.
Despite these calls for flexibility, Nepal’s banking sector remains under pressure. Non-performing loans (NPLs) have risen slightly, exceeding 4%. However, Regmi pointed out that net NPLs remain below 3%, suggesting that the situation, while concerning, is not yet critical. Over the past five months, credit expansion has fallen short of expectations. While commercial banks managed to extend over NPR 90 billion in loans during the month of Poush (mid-December to mid-January), NPR 20 billion was withdrawn by the first week of Magh (mid-January), casting doubt on the sustainability of recent gains.
The challenges are compounded by rising hostility toward banks and their staff. NBA President Santosh Koirala reported incidents of physical assaults on bank employees during loan recovery efforts. “Local authorities have not provided the expected level of security and support,” Koirala said. “This hostility, combined with increasing NPLs and inadequate credit expansion, reflects the broader economic struggles of the country.”
Economic uncertainties and subdued demand for credit are further exacerbating the problem. Despite low-interest rates, businesses remain hesitant to borrow, reflecting a lack of confidence in the economic environment. The contraction in credit during Magh suggests that even when loans are extended, they are not being utilized sustainably.
Moreover, the lack of robust mechanisms to address repayment issues has intensified the pressure on banks. Efforts to recover loans are met with resistance, partly due to the economic downturn and partly due to systemic inefficiencies. The combination of rising NPLs, constrained credit expansion, and weak recovery mechanisms indicates a growing risk to the financial sector.
Bankers agree that immediate action is required to address these challenges. They call for a comprehensive review of regulatory frameworks to introduce flexibility in capital adequacy requirements. Such measures, they argue, would provide breathing room for banks and help restore confidence in the financial system.
The current state of the banking sector reflects broader economic concerns. Without swift intervention from the central bank and policymakers, the challenges of credit expansion and recovery could undermine Nepal’s economic resilience. As the financial sector grapples with these issues, the need for decisive and pragmatic policy measures has never been greater.