Cheap loans fail to spur credit growth, Experts warn of deep structural weaknesses in Nepal’s economy

KATHMANDU: Nepal’s persistently low lending rates have failed to translate into a meaningful increase in private-sector borrowing, exposing deeper structural weaknesses in the country’s economy that cannot be addressed through monetary policy alone, economists, bankers, regulators and business leaders concluded during a high-level policy discussion on the role of monetary policy in accelerating economic growth.

Speaking at a program titled “The Role of Monetary Policy in Accelerating Economic Growth,” organized by the Society of Economic Journalists-Nepal (SEJON), participants argued that although borrowing costs have fallen to multi-year lows, demand for credit remains sluggish due to weak business confidence, regulatory bottlenecks, structural distortions and uncertainty surrounding future economic conditions.

The discussion comes as the Nepal Rastra Bank (NRB) prepares its monetary policy for the upcoming fiscal year amid slowing private-sector investment, subdued credit expansion and concerns over Nepal’s pace of economic recovery.

Structural Problems Behind Weak Credit Growth

Banking expert Anal Raj Bhattarai said the inability of banks to significantly expand lending despite historically low interest rates is a clear indication that Nepal’s economic challenges have moved beyond monetary policy.

“The fact that loan demand remains weak even when borrowing has become cheaper reflects structural problems within the economy,” Bhattarai said.

According to him, Nepal Rastra Bank has yet to adequately address several regulatory barriers that continue to discourage lending and investment.

One such issue is the mandatory credit rating requirement for loans exceeding Rs 500 million, which he believes should be reviewed. While introduced to strengthen risk management, the requirement has also increased compliance costs and delayed financing for large investment projects.

Bhattarai further noted that several prudential and regulatory provisions have left banks in a position where they possess sufficient liquidity but remain unable to lend efficiently.

“The banking system needs modernization,” he said. “Instead of forcing customers to use separate applications for every bank, Nepal should move toward an Open Banking framework where services are integrated through a unified digital platform.”

According to him, Open Banking would improve financial inclusion, enhance competition, reduce operational costs and provide customers with seamless access to financial services.

NRB Signals Broader Monetary Policy Framework

Acting Governor Kiran Pandit acknowledged that Nepal’s upcoming monetary policy can no longer focus solely on conventional central banking tools.

He said fiscal policy considerations have increasingly become intertwined with monetary management, making closer coordination between the government and the central bank essential.

“The monetary policy will be prepared after carefully considering the overall economic situation, market expectations and concerns raised by different sectors,” Pandit said.

He also stressed the need to reshape public expectations regarding Nepal’s economy.

“We need to change expectations. Some of the narratives surrounding the economy also need to be corrected,” he remarked.

Pandit said the time has come for Nepal to seriously explore stronger collaboration between banks, fintech companies and Open Banking platforms.

He further observed that the voices of young entrepreneurs, farmers and participants in Nepal’s real economy often fail to reach policymakers.

“The distance between policymakers and stakeholders needs to be reduced,” he said, emphasizing the importance of making economic policymaking more inclusive.

Banking Profits Under Pressure Despite Positive Earnings

Dilip Munankarmi, Vice-President of the Confederation of Banks and Financial Institutions Nepal (CBFIN), challenged the public perception that commercial banks are enjoying extraordinary profits.

Although financial statements indicate banks continue to report billions of rupees in earnings, he explained that distributable profits have turned negative for several institutions after provisioning and regulatory adjustments.

“As a result, some banks have been unable to distribute dividends for several years,” he said.

Munankarmi warned that prolonged zero-dividend periods could discourage investors from holding banking shares, potentially affecting long-term capital formation in Nepal’s financial sector.

Businesses Remain Hesitant Despite Low Interest Rates

Representing the private sector, Anand Bagaria, Managing Director of Nimbus, said lower interest rates alone are insufficient to stimulate borrowing.

According to Bagaria, many businesses remain reluctant to take long-term loans because they fear borrowing costs could rise significantly in the future.

“Businesses worry that today’s low interest rates may not remain low throughout the loan period,” he said.

He also criticized what he described as an excessively compliance-driven banking system.

“Sometimes it feels as though banking is only about meeting quarterly targets,” Bagaria remarked.

He argued that intensive regulatory oversight has gradually reduced innovation within Nepal’s banking industry and urged banks to adopt more creative approaches to financing productive sectors.

Depositor Protection Remains Central Bank Priority

Speaking at the same event, Guru Prasad Paudel, Executive Director of Nepal Rastra Bank, said policymakers should now focus more on solving practical problems rather than engaging in prolonged debates.

Paudel acknowledged concerns that continuously falling interest rates could adversely affect depositors.

“The central bank has remained cautious about protecting depositors,” he said.

He explained that NRB’s decision to maintain the interest rate corridor floor at 2.75 percent prevented deposit rates from falling even further.

“If that floor had not been maintained, interest rates could have fallen close to one percent,” Paudel said.

He added that maintaining the interest rate corridor has imposed considerable costs on the central bank itself but emphasized that safeguarding depositors remains one of NRB’s primary responsibilities.

Paudel also stressed that a healthy banking system is essential for private-sector expansion.

“If banks and financial institutions are not strong, the private sector cannot lead economic growth,” he noted, while emphasizing that financial institutions must continue operating prudently.

Bankers Seek Review of Provisioning Rules

Santosh Koirala, President of the Nepal Bankers’ Association, called for a review of existing provisioning requirements under Nepal’s banking regulations.

He said the current rule requiring banks to make 100 percent provisioning within one year forces banks to initiate aggressive recovery measures against borrowers, even when businesses may still have prospects for recovery.

“The provisioning framework needs to be reviewed,” Koirala said.

He also criticized what he described as an increasingly negative public narrative portraying banks as excessively profit-driven institutions.

According to Koirala, Nepal’s banking sector currently generates an average return of only around 7 percent, far below public perceptions.

“If transparency is ensured across all sectors, meaningful comparisons can be made,” he said.

While acknowledging that commercial banks are established to generate profits, Koirala argued that current returns are not excessive and remain below reasonable expectations for investors.

Recommendations for the Upcoming Monetary Policy

Koirala urged Nepal Rastra Bank to introduce several reforms in the forthcoming monetary policy.

Among his recommendations were:

• Revising the methodology used to calculate the base lending rate;
• Allowing banks to distribute reserves accumulated through loan redemption as bonus shares where appropriate;
• Introducing more flexible branch management policies;
• Expanding centralized Know Your Customer (KYC) systems to reduce duplication and improve efficiency; and
• Continuing regulatory modernization to support financial innovation.

Monetary Policy Alone Cannot Drive Growth

A common message emerged throughout the discussion: lower interest rates by themselves are no longer sufficient to revive economic activity.

Participants argued that Nepal’s economic slowdown is increasingly driven by weak investor confidence, regulatory complexity, slow project implementation, declining private investment and broader structural inefficiencies rather than the cost of borrowing alone.

They emphasized that the upcoming monetary policy should therefore move beyond traditional liquidity management and incorporate broader reforms aimed at strengthening financial innovation, modernizing banking regulation, improving coordination with fiscal policy and rebuilding confidence among businesses and investors.

As Nepal prepares its monetary policy for the new fiscal year, the debate suggests that restoring stronger economic growth will require not only accommodative financial conditions but also comprehensive structural reforms capable of unlocking private-sector investment and enhancing the competitiveness of the country’s financial system.