Facing a surge in non-performing loans, Nepal’s Banks and Financial Institutions (BFIs) are increasingly favoring consumption-based lending over production-oriented credit in an effort to reduce recovery risks.
According to a report published by the Nepal Rastra Bank through its Banks and Financial Institutions Regulation Department, BFIs had extended Rs 1.261 trillion in consumption loans by mid-January of the current fiscal year. Within just one month—from mid-December to mid-January—over Rs 51 billion flowed into this segment, underscoring the growing preference for consumer financing.
By contrast, lending to agriculture, forestry, and production-related sectors—including beverages and non-food manufacturing—totaled a comparatively modest Rs 965.25 billion. Loans directed toward wholesale and retail trade reached Rs 1.040 trillion, indicating that a significant share of bank credit is supporting imported goods rather than strengthening domestic production capacity.
The report further highlights the limited priority given to the primary sector. Credit extended to agriculture and forestry stood at only Rs 354.79 billion during the review period, down from Rs 369.62 billion two years earlier. Between mid-December and mid-January, the increase in this category was just Rs 3 billion, reflecting sluggish growth.
Although overall financial access appears to be improving—with the deposit-to-GDP ratio at 126.47 percent and the loan-to-GDP ratio at 94.86 percent—regional disparities remain pronounced. Bagmati Province hosts 2,279 BFI branches, serving roughly 2,684 people per branch. In contrast, Karnali Province has only 243 branches, where each branch serves about 6,948 people.
As of mid-January, the national non-performing loan (NPL) ratio had climbed to 5.42 percent of total credit. Among institutions, ‘C’ class finance companies face the greatest strain, with an NPL ratio of 11.86 percent. They are followed by ‘B’ class development banks at 5.75 percent and ‘A’ class commercial banks at 5.26 percent.
To cushion potential losses, BFIs have set aside provisions equivalent to 5.83 percent of their total loan portfolio. However, this substantial provisioning is weighing heavily on profitability and putting additional pressure on maintaining required capital adequacy ratios.
