Governor slams unproductive lending, calls for policy overhaul as NPL surges in priority sectors

KATHMANDU: Nepal Rastra Bank (NRB) Governor Dr. Baikuntha Bishwa Paudel has issued a stark warning over the deteriorating quality of bank lending, pointing out that a significant portion of credit has been flowing into unproductive sectors, undermining the real economy and risking systemic financial inefficiencies.

Speaking at a policy dialogue organized by the Society of Economic Journalists of Nepal (SEJON) on Sunday, Governor Paudel revealed that even in areas the central bank has identified as priority sectors, non-performing loans (NPLs) are rising, leading commercial banks to exercise unwarranted caution in further credit disbursement.

“There’s an observable increase in bad loans even in the prioritized sectors we’ve encouraged banks to lend in,” he said. “This trend is making banks reluctant to invest where it’s most needed, and capital is not reaching productive corners of the economy.”

The governor’s remarks come at a critical juncture for Nepal’s banking sector, as concerns mount over stagnant private sector credit growth, asset quality deterioration, and policy inefficiencies.

Banks Flush with Deposits, But Credit Remains Idle

Dr. Paudel noted that despite an all-time high in banking deposits and foreign exchange reserves, credit flows remain sluggish and misallocated. He urged all stakeholders, including government agencies and the private sector, to give the upcoming monetary policy room to operate, instead of prematurely dismissing it.

‘Monetary policy must be allowed to function. NRB cannot fix the economy alone — the responsibility is shared,’ Paudel stressed, signaling toward a need for cohesive inter-agency cooperation.

Bankers Voice Frustration Over Profitability and Policy Rigidity

Echoing the central bank chief’s concerns, Santosh Koirala, President of the Nepal Bankers’ Association and CEO of Machhapuchhre Bank, warned that dividend distribution has become nearly impossible for many banks due to shrinking profits caused by restrictive regulatory policies.

‘Banks are investment vehicles too. Our shareholders expect returns,’ Koirala said. ‘Right now, the sector is squeezed. We need flexible policies to allow the economy to bounce back.’

He specifically requested that the 2025/26 monetary policy introduce relief-driven, pro-growth provisions, including an overhaul of the current Directive Lending Policy and support for asset restructuring frameworks.

Koirala proposed the creation of a powerful Asset Management Company (AMC) to address the growing pile of non-banking assets (NBAs) on banks’ balance sheets, which are proving difficult to liquidate due to bureaucratic obstruction at the local level.

“Even to sell a house, banks are forced to beg for approval from local governments. We need an independent asset manager that can resolve NBAs without administrative bottlenecks.”

Poor Financial Literacy and Governance Gaps

Upendra Prasad Paudel, Chairperson of the Confederation of Banks and Financial Institutions Nepal (CBFIN) and Chairman of Nabil Bank, further emphasized that the growing NPL problem is not merely a technical issue but is deeply rooted in low borrower awareness and lack of credit utilization skills among small borrowers.

He acknowledged that banks have failed to invest adequately in the financial literacy and capacity building of their clients, particularly in small and medium-sized enterprise (SME) segments.

Paudel called for a comprehensive review of the directive lending system, noting that the time has come for NRB to commission a dedicated study on its efficiency, sustainability, and economic impact. He warned that without an immediate shift, the overall direction of the financial sector — and by extension the national economy — could derail.

‘If the banking sector strays from sound direction, the entire economy risks being dragged down with it,’ Paudel stated. ‘Governance in the financial sector should be a model for all sectors of the state.’