Nepal’s banking sector faces loan contraction despite lower interest rates

KATHMANDU: Nepal’s banking sector is grappling with a troubling trend: despite a decline in interest rates, loan investments have contracted, signaling sluggish economic activity. In a surprising development, banks reported a NPR 7 billion reduction in loan disbursements in the month of Baisakh, with total loan investments dropping from NPR 49.15 trillion at the end of Chaitra to NPR 49.08 trillion by the end of Baisakh. This contraction highlights deeper challenges in Nepal’s economy, including low credit demand and a lack of business-friendly conditions.

Persistent Decline in Loan Demand

Bankers attribute the contraction to a persistent lack of demand for credit, even as interest rates have become more favorable. Devendra Raman Khanal, CEO of National Commercial Bank, expressed frustration over the inability to boost loan disbursement despite introducing various credit expansion schemes. “We have launched multiple schemes to expand credit. However, no matter what we do, demand hasn’t picked up,” Khanal said. He noted that the final quarter of the fiscal year often involves managerial adjustments, with loans shifting between institutions but failing to generate new demand. “Even though loans shift from one place to another, there is no real demand for credit,” he added.

This isn’t the first instance of loan contraction this fiscal year. In Kartik, loans shrank by NPR 2 billion, underscoring a recurring challenge for Nepal’s banking sector. While the fiscal year saw periods of growth—NPR 2 billion in Shrawan, NPR 53 billion in Bhadra, NPR 56 billion in Ashoj, NPR 42 billion in Mangsir, NPR 94 billion in Poush, NPR 12 billion in Magh, NPR 23 billion in Falgun, and NPR 65 billion in Chaitra—the recent decline in Baisakh has raised concerns about the sustainability of credit growth.

Economic Slowdown at the Core

The lack of credit demand reflects broader economic challenges in Nepal. Nischal Raj Pandey, CEO of Sanima Bank, acknowledged that while the 7 percent growth in loan investments over the past 10 months is a positive sign, the overall economic environment remains unfavorable. “There isn’t a business-friendly environment for loan investment to grow. Consumption hasn’t increased, and people’s incomes haven’t risen. As a result, demand for loans is sluggish,” Pandey said. He emphasized that the sluggish demand is indicative of slow economic activity but highlighted the 7 percent loan growth as a silver lining. “In such times, a 7 percent increase in loans over 10 months is something to be happy about,” he added.

The absence of demand is particularly pronounced in key sectors. Large-scale projects and the corporate sector, which typically drive significant credit growth, have shown little interest in borrowing. “There is no demand for loans in the real estate sector right now. Industrial and project loans are virtually nonexistent,” said another bank CEO, speaking anonymously. “We are just managing by disbursing small loans.”

Sectoral Challenges and Economic Implications

The real estate sector, once a major driver of loan demand, has seen a sharp decline in borrowing activity. Similarly, industrial and project financing have stalled, leaving banks to rely on smaller retail loans to sustain their portfolios. This shift has significant implications for Nepal’s economy, which is already grappling with low consumption and stagnant income growth.

The lack of a business-friendly environment is a recurring concern among bankers. Factors such as regulatory hurdles, limited infrastructure development, and weak consumer confidence are stifling economic activity. Without a robust increase in consumption or investment in large-scale projects, the demand for loans is likely to remain subdued, posing challenges for banks’ profitability and the broader economy.

The contraction in loan investments underscores the need for structural reforms to stimulate economic growth. Bankers are calling for policies that foster a more conducive environment for businesses, including streamlined regulations, incentives for large-scale projects, and measures to boost consumer spending. Without such interventions, the banking sector may continue to face challenges in expanding credit and supporting economic recovery.

As Nepal navigates these economic headwinds, the banking sector’s ability to adapt will be critical. While the 7 percent loan growth over 10 months offers some optimism, the recent contraction in Baisakh serves as a reminder of the underlying challenges. For now, banks are left to navigate a landscape of low demand and cautious optimism, hoping for a revival in economic activity to drive future credit growth.