Nepal’s economy strengthens on remittance, Reserves and credit growth, but banking sector stress persists: NRB

KATHMANDU: Nepal’s economy continued to show signs of recovery and resilience during the first ten months of the current fiscal year, supported by strong remittance inflows, rising foreign exchange reserves, expanding bank deposits, growing digital transactions and a stronger stock market. However, stress within the banking sector remains evident as non-performing loans (NPLs) continue to rise, according to the latest macroeconomic report released by Nepal Rastra Bank (NRB).

The central bank’s assessment of the economy up to mid-May 2026 presents a mixed picture: external sector indicators have strengthened significantly, inflation remains relatively under control and liquidity conditions have improved, but credit expansion remains moderate and asset quality in banks remains under pressure.

Foreign Exchange Reserves Reach Historic Levels

One of the strongest aspects of Nepal’s economy remains its external sector.

The country’s foreign exchange reserves continued to rise during the review period, driven largely by record remittance inflows and a healthy balance of payments position.

The increase in reserves has significantly enhanced Nepal’s ability to finance imports and maintain external stability amid global economic uncertainties. Strong reserve accumulation has also provided the central bank with greater flexibility in managing exchange rate pressures and supporting macroeconomic stability.

Economists note that Nepal’s external sector is currently in one of its strongest positions in recent years, largely due to sustained labor migration and remittance earnings.

Remittance Continues to Power the Economy

Remittance remains the backbone of Nepal’s economy, supporting household consumption, savings, imports and financial sector liquidity.

The continued outflow of Nepali workers abroad and increasing use of formal banking channels have helped sustain remittance growth throughout the fiscal year.

The inflows have boosted foreign exchange reserves, strengthened bank deposits and supported domestic demand at a time when private sector investment remains relatively subdued.

Analysts say Nepal’s economy remains heavily dependent on remittances, making overseas employment a critical pillar of economic stability.

Inflation Remains Manageable

The NRB report indicates that inflationary pressures remained relatively moderate during the review period compared with previous years.

Stable food supplies, easing global commodity prices and improved domestic production helped keep consumer price growth within manageable levels.

Controlled inflation has provided some relief to households and businesses that faced elevated costs during previous periods of global economic disruption.

However, economists caution that imported inflation risks remain due to Nepal’s dependence on imports for fuel, machinery and consumer goods.

Banking Sector Liquidity Improves

Improving deposit growth and strong remittance inflows have significantly eased liquidity pressures within the banking system.

Banking institutions have maintained comfortable liquidity positions, allowing greater flexibility in lending and financial intermediation.

According to NRB, the average net liquid assets-to-deposit ratio of banks and financial institutions stood at 35.88 percent as of mid-May 2026, indicating ample liquidity within the system.

Capital adequacy indicators also remained above regulatory requirements.

Preliminary data show that the average core capital-to-risk weighted assets ratio stood at 9.76 percent, while the total capital-to-risk weighted assets ratio reached 12.70 percent.

These figures suggest that Nepal’s banking system remains adequately capitalized despite challenges in loan recovery.

Rising Bad Loans Remain a Concern

Despite improvements in liquidity and deposits, the quality of bank assets continues to deteriorate.

According to NRB, the non-performing loan ratio of banks and financial institutions increased to 5.60 percent as of mid-April 2026.

The rise in bad loans reflects ongoing difficulties faced by businesses and borrowers in meeting debt obligations.

Bankers say sectors such as real estate, construction, small enterprises and certain trading businesses continue to face repayment challenges due to slower economic activity and weak demand in recent years.

The increase in NPLs remains one of the most closely watched indicators in Nepal’s financial system, as further deterioration could affect lending capacity and profitability.

Financial Inclusion Continues to Expand

Nepal’s banking network remains one of the most extensive in South Asia relative to population size.

As of mid-May 2026, a total of 106 banks and financial institutions (BFIs) were operating in Nepal, including 20 commercial banks, 17 development banks, 17 finance companies, 51 microfinance institutions and one infrastructure development bank.

The total number of branches stood at 11,359, slightly lower than the 11,526 branches recorded a year earlier, reflecting ongoing consolidation and digitization within the sector.

Banking penetration continues to expand.

The number of deposit accounts in Class A, B and C institutions reached 62.72 million, up from 59.03 million a year ago. Loan accounts increased to more than 2.03 million, reflecting growing participation in the formal financial system.

Digital Banking Transactions Surge

The report highlights Nepal’s rapid transition toward a digital economy.

Mobile banking remains the dominant digital payment channel.

Between mid-March and mid-May 2026, users conducted 78.89 million mobile banking transactions worth Rs 612.39 billion.

QR-code payments also witnessed substantial growth, with 59.26 million transactions totaling Rs 162.58 billion during the same period.

Meanwhile, debit card holders carried out 10.65 million transactions worth Rs 82.93 billion.

The figures underscore the growing adoption of digital financial services as consumers increasingly shift away from cash-based transactions.

Industry observers believe Nepal is approaching a major milestone in digital financial inclusion, driven by widespread smartphone adoption, QR payment acceptance and improved digital infrastructure.

Stock Market Gains Momentum

Nepal’s capital market also showed notable improvement during the review period.

The benchmark NEPSE Index rose to 2,730.18 points in mid-May 2026 from 2,620.27 points a year earlier.

Market capitalization climbed to Rs 4.66 trillion, compared with Rs 4.36 trillion in mid-May 2025. The ratio of market capitalization to GDP increased slightly to 70.55 percent.

The number of listed companies increased to 294, compared with 271 companies a year earlier. Hydropower companies accounted for a significant portion of new listings, highlighting investor interest in Nepal’s energy sector.

Banking and insurance institutions continue to dominate the market, accounting for 50.7 percent of total market capitalization, followed by hydropower companies with 17.5 percent.

During the first ten months of the fiscal year, securities worth Rs 136.30 billion were listed on NEPSE, including ordinary shares, bonus shares, rights shares, mutual funds and debentures.

Similarly, the Securities Board of Nepal approved public issuances worth Rs 41.53 billion, reflecting continued activity in the primary market.

Outlook

The latest NRB assessment suggests Nepal’s economy is entering the final months of FY 2025/26 with stronger macroeconomic fundamentals than a year ago. Robust remittance inflows, record foreign exchange reserves, comfortable banking liquidity, growing digital transactions and a recovering capital market have improved overall economic stability.

However, the rise in non-performing loans and relatively cautious private-sector credit demand indicate that underlying structural challenges remain. Policymakers are expected to focus on stimulating productive investment, improving loan recovery, expanding exports and sustaining financial sector stability as they prepare monetary and fiscal policies for the next fiscal year.

For now, the central bank’s data indicate that Nepal’s economic recovery remains on track, though maintaining momentum will require stronger domestic investment and continued reforms to address vulnerabilities in the banking sector.