Banks and financial institutions (BFIs) in Nepal have continued to struggle in expanding their lending portfolios during the first two months of the current fiscal year (FY 2025/26), constrained by sluggish economic activity and persistent political instability.
According to the latest Current Macroeconomic and Financial Situation report published by Nepal Rastra Bank (NRB), credit flow from BFIs increased by only 0.6 percent between mid-July and mid-September 2025. Out of their total loan portfolio of Rs 5.592 trillion at the end of the last fiscal year, BFIs extended just Rs 35.48 billion in additional loans during the review period.
Liquidity Surplus Persists Despite Weak Credit Demand
For the past few years, BFIs have been grappling with an excessive liquidity surplus caused by a sharp slowdown in credit demand. Despite cutting interest rates to record lows, banks have failed to stimulate borrowing in key economic sectors.
While the NRB continues its efforts to manage liquidity within the financial system, BFIs have been parking trillions of rupees in the central bank, earning minimal returns. The ongoing lack of productive credit deployment has raised concerns over profitability and long-term financial stability.
Credit Flow Declines in Key Sectors
During the first two months of FY 2025/26, BFIs recorded a contraction in lending across four major sectors: personal overdrafts, real estate, deprived sector financing, and bill purchase loans.
- Personal overdraft loans decreased by 3.6 percent.
- Real estate loans fell by 1.6 percent.
- Deprived sector lending dropped by 5.9 percent.
- Bill purchase loans declined by 4.4 percent.
Slight Growth in Import and Share-Backed Loans
In contrast, import loans rose by 6.7 percent, reaching Rs 8.44 billion, while loans against shares increased by 3.5 percent (Rs 4.9 billion). Personal home loans of up to Rs 20 million grew by 2.3 percent, amounting to Rs 9.79 billion during the same period.
With the rise in margin lending, total loans backed by shares have now reached Rs 145.60 billion. Similarly, cash flow loans rose by 1.7 percent (Rs 11.12 billion), and term loans increased by 1.1 percent (Rs 23.22 billion). Other loan categories recorded growth rates below one percent.
Modest Growth in Deposits
Deposit mobilization by BFIs showed only marginal improvement, rising by 0.5 percent between mid-July and mid-September. According to the NRB, total deposits increased by Rs 32.68 billion, reaching Rs 7.296 trillion in aggregate.
Outlook
The combination of weak credit demand, declining sectoral lending, and a persistent liquidity overhang continues to pose challenges for Nepal’s banking industry. Unless business confidence improves and investment activity picks up, BFIs may face prolonged periods of low lending growth and subdued profitability.
