Credit extended to private sector increases significantly

Kathmandu, May 2: The credit extended to the private sector by banks and financial institutions (BFIs) has increased significantly over the past decade. 

According to Nepal’s Current Economic Situation Report, recently made public by the Ministry of Finance, the ratio of credit extended to the private sector to gross domestic product increased from 55.2 per cent in mid-July 2015 to 91.6 per cent in mid-July 2025.

This ratio is higher than that of any other South Asian country. In 2023, India had a similar ratio of 56.6 per cent, Bangladesh 35.7 per cent, Sri Lanka 27.3 per cent, and Pakistan 11.5 per cent.

However, credit expansion has slowed in recent years. 

Credit extended to the private sector increased by only 8.1 per cent in the last fiscal year and by 4.4 per cent in the first eight months of the current fiscal year, reaching Rs. 5,741 billion by mid-March 2026.

According to the report, the credit demand has not been able to increase due to weak aggregate demand in the post-COVID period, declining business confidence caused by political instability, sluggish capital expenditure, and the lack of development of entrepreneurship. 

The credit expansion has also been affected by problems in the cooperative sector and the slowdown in real estate transactions. Similarly, over the past decade, deposits in banks and financial institutions have grown at an average rate of 15.8 per cent. In the first eight months of the current fiscal year, such deposits increased by 6.6 per cent, reaching Rs. 7,746 billion by mid-March 2026. 

Despite recent economic sluggishness, the report said that rising remittance inflows have continued to support deposit mobilisation.

Liquidity surplus persists amid weak credit demand

As credit expansion has remained lower than deposit mobilisation, there is ample investable liquidity in the financial system. 

On the one hand, there is a lack of demand for loans to support investment growth, while on the other hand, liquidity management for banks is becoming increasingly challenging.

Excess liquidity maintained by BFIs at the central bank increased from Rs. 654 billion in mid-July 2025 to Rs. 904 billion as of March 26, 2026. 

Data show that over the past three years, credit and investment have remained lower relative to deposits, resulting in a persistent surplus of liquidity.

Likewise, interest rates on deposits and loans of BFIs are low and continue to decline. 

The average lending rate, which was 8.86 per cent in mid-July 2016 and rose above 12.5 per cent in FY 2020/21, declined to 7.06 per cent by mid-March 2026.

BFIs face rising pressure from growing NPL 

The non-performing loans (NPL) of BFIs have started increasing. 

The NPL ratio, which was 3.33 per cent in mid-July 2015 and 3.02 per cent in mid-July 2023, has reached 5.42 per cent in mid-July 2026. 

The NPL ratio of development banks and finance companies is higher compared to that of commercial banks.

Meanwhile, the number of banks and financial institutions is decreasing. The number of licensed banks and financial institutions (including microfinance institutions) has fallen from 178 in mid-July 2025 to 106 in mid-March 2026.

According to the report, while overall financial access is increasing, access to credit is lagging. 

Over the past decade, financial literacy has improved due to the expansion of bank branches, the expansion of information technology-based banking services, and the entry of new financial service providers. 

According to the Nepal Rastra Bank, financial literacy was 57.9 per cent in 2022. 

Loan accounts remain low

Over the past decade, the number of deposit accounts in banks and financial institutions has increased by 3.4 times to 62.6 million as of mid-March 2026. 

However, access to credit is comparatively low. During this period, the number of loan accounts has increased by 1.7 times to 2.04 million.

 In the coming days, it is necessary to significantly increase access to loans by promoting financial literacy, developing entrepreneurship, and providing project-based loans.

The report showed that microfinance institutions have contributed to the growth of financial access. 

As of mid-February 2026, savings mobilisation worth Rs. 215 billion and loans worth Rs. 508 billion have been made through microfinance institutions. 

The number of members taking loans from these institutions is 2.722 million.

According to the report, there has been a significant increase in electronic payment transactions in the wake of the COVID-19 pandemic. 

As a result of policy facilitation for electronic payments and the development of various types of devices, the proportion of transactions involving cash and checks is decreasing.