BFIs pump Rs 1.78 trillion into industry, Yet Factories Run at Just 43% Capacity

KATHMANDU: Nepal’s banking and financial sector has increased its exposure to the industrial sector to nearly Rs 1.78 trillion, but the country’s factories and industrial enterprises continue to operate far below their potential, with average capacity utilization remaining at just over 42 percent.

According to the latest semi-annual study released by Nepal Rastra Bank (NRB), total credit extended by banks and financial institutions to industries reached Rs 1.778 trillion by mid-January 2026 (Poush-end 2082), representing a 7.99 percent increase compared to the same period a year earlier.

Despite the growth in industrial financing, the report shows that industrial activity remains subdued. During the first six months of the current fiscal year, industries across Nepal operated at an average capacity utilization rate of only 42.11 percent, slightly lower than the 42.94 percent recorded during the corresponding period of the previous fiscal year.

461 New Industries Registered

The report highlights continued investment interest in Nepal’s industrial sector, with 461 new small, medium, and large industries registered during the first half of the fiscal year.

Bagmati Province accounted for the highest number of new industrial registrations, with 363 industries established, while Sudurpashchim Province recorded only four new registrations.

The newly registered industries attracted proposed foreign investment commitments worth Rs 55.83 billion and are expected to generate employment for 22,885 people.

Garment Sector Leads Industrial Performance

Among the industries surveyed, garment manufacturing recorded the highest capacity utilization rate at 95.74 percent, followed by other textile industries at 90 percent.

Hydropower generation industries operated at 82.74 percent capacity utilization, while tire and tube manufacturers achieved 76.20 percent utilization. Instant noodle producers utilized around 70 percent of their installed capacity.

The NRB study found that capacity utilization improved in several sectors, including garments, sugar, steel products, soybean oil, aluminum products, beer, processed leather, ointments, tires and tubes, chemicals, sawn timber, soft drinks, liquor, biscuits, yarn, and cement.

However, capacity utilization declined in industries producing GI pipes, raw leather, vegetable ghee, cigarettes, bricks, GI wire, dry syrup, steel rods and sheets, footwear, wheat flour, processed tea, processed milk, paper, electric wires and cables, and household metal products.

Wide Provincial Disparities

The report reveals significant regional disparities in industrial performance.

Lumbini Province recorded the highest average industrial capacity utilization at 50.44 percent, while Sudurpashchim Province lagged far behind at just 30.82 percent.

Industrial capacity utilization increased in Madhesh, Bagmati, Lumbini, and Karnali provinces during the review period, while Koshi, Gandaki, and Sudurpashchim provinces experienced declines.

Bagmati Dominates Industrial Credit

Industrial lending remains heavily concentrated in Bagmati Province, which alone accounts for Rs 1.284 trillion, or 72.22 percent, of total industrial credit disbursed by banks and financial institutions.

In contrast, Karnali Province received only Rs 4.41 billion, representing just 0.25 percent of total industrial lending.

The provincial distribution of industrial credit stands at:

• Koshi Province: 9.22%
• Madhesh Province: 7.22%
• Bagmati Province: 72.22%
• Gandaki Province: 1.62%
• Lumbini Province: 7.91%
• Karnali Province: 0.25%
• Sudurpashchim Province: 1.55%

Manufacturing Still Commands Largest Share

Of the total industrial credit portfolio, 35.67 percent has been directed toward non-food manufacturing industries, making it the largest recipient category.

Agriculture, forestry and beverage-related industries account for 20.64 percent of industrial lending, while electricity, gas and water industries receive 26.62 percent. Construction-related industries account for 12.26 percent, mining industries for 0.67 percent, and metal products, machinery and electronics industries for 4.14 percent.

Industrial loans currently represent 30.82 percent of the total lending portfolio of Nepal’s banking sector.

Growth Potential Remains Strong

Despite weak capacity utilization, NRB sees substantial long-term potential for industrial expansion.

The report points to ongoing hydropower development, government investment in Special Economic Zones (SEZs) and industrial estates, abundant agricultural resources, medicinal herbs, and mineral deposits as key opportunities for future industrial growth.

The central bank also highlights growing prospects in software development, information technology services, business process outsourcing, and other digital industries as Nepal’s digital economy expands.

Favorable policy measures, including government preference for domestically produced goods, public-private partnerships, easier access to banking services, lower interest rates, ample liquidity within the financial system, rapid urbanization, and increasing digital adoption are expected to support future industrial development.

Competitiveness Remains Key Challenge

However, the study warns that improving the competitiveness of Nepalese industries remains a major challenge. High production costs, limited economies of scale, infrastructure constraints, and competition from imported products continue to undermine industrial performance.

The report stresses the need to enhance transparency, strengthen corporate governance, and build investor confidence to mobilize larger amounts of capital from the general public and institutional investors.

According to NRB, reducing production costs while improving the competitiveness of Nepal-made products in domestic and international markets will be critical if the country is to transform rising industrial investment into stronger manufacturing output, exports, and employment generation.