Financial sector shows mixed signals as digital banking expands, NPL rises to 5.42%

KATHMANDU: Nepal’s financial sector has shown signs of both strength and emerging pressure, with expanding digital transactions improving financial access while rising non-performing loans (NPLs) and slowing credit growth highlight underlying stress, according to the Economic Survey 2082/83 presented by Finance Minister Dr. Swarnim Waglé.

The survey states that technological advancement and increased use of electronic payment systems have significantly improved financial inclusion across the country.

Digital Transactions Boost Financial Access

The rapid expansion of digital banking and electronic payments has contributed to broader financial access in Nepal. The survey notes that increased use of mobile banking, internet banking, and digital payment platforms has strengthened participation in formal financial systems.

This growing digital shift has been supported by the expansion of payment infrastructure, including payment service providers and payment system operators, which have increased accessibility across urban and rural areas.

Banking Sector Remains Stable but Credit Growth Slows

Despite challenges in the broader economy, the banking sector remains structurally stable. Key indicators such as capital adequacy and liquidity ratios remain above regulatory requirements, indicating overall financial stability.

However, the survey highlights that economic slowdown has led to a decline in credit expansion. Weak business activity has affected loan demand and repayment capacity, contributing to an increase in non-performing loans.

At the same time, strong remittance inflows have increased liquidity in the banking system, but weak domestic demand has prevented proportional credit absorption, resulting in excess liquidity in financial institutions.

Structure of Financial Institutions

As of Falgun 2082, Nepal’s financial system comprises:

• 20 commercial banks
• 17 development banks
• 17 finance companies
• 51 microfinance institutions
• 1 infrastructure development bank

In total, 106 banking and financial institutions are in operation.

In addition, the financial system also includes:

• 37 insurance companies
• Over 30,000 cooperatives
• Employee Provident Fund
• Citizen Investment Trust
• Social Security Fund
• Deposit and Credit Guarantee institutions
• Mutual funds

The survey highlights that the banking sector continues to dominate Nepal’s financial system in terms of assets and liabilities.

Banking Sector Dominates Financial Assets

Excluding cooperatives, social security funds, and mutual funds, banks and financial institutions account for the majority of financial system assets.

• Banking sector share: 86.2% of total financial assets (Poush 2082)
• Nepal Rastra Bank share: 20.7%
• Commercial banks share: 55.2%
• Other banking institutions: 10.3%
• Insurance and contractual savings institutions: 13.8%

The combined assets and liabilities of banks and insurance institutions amount to 251.8% of GDP, reflecting the deep financialization of Nepal’s economy.

Rising Foreign Assets and Credit Exposure

The financial sector’s net foreign assets rose significantly to NPR 2.668 trillion (26 kharba 68 arba 2 crore) by Asar 2082, up from NPR 1.982 trillion a year earlier.

Domestic claims also expanded, including:

• Total domestic claims: NPR 7.709 trillion
• Claims on private sector: NPR 6.589 trillion
• Claims on government: NPR 1.078 trillion
• Claims on non-financial public institutions: NPR 41.63 billion

Liquidity and Money Supply Growth

The financial system’s liquidity position shows continued expansion:

• Total liquid liabilities: NPR 6.771 trillion
• Currency in circulation: NPR 650.24 billion
• Demand deposits: NPR 429.67 billion
• Other deposits: NPR 5.791 trillion

Broad money supply continues to grow, reflecting increased liquidity in the system.

NPL Rises to 5.42 Percent

The report shows rising stress in the banking sector as non-performing loans (NPLs) increased to 5.42 percent, up from 4.92 percent in the previous year.

Although still within manageable limits, the increase signals rising repayment pressure among borrowers due to economic slowdown.

Capital Adequacy Declines Slightly

Key capital adequacy indicators have slightly weakened:

• Core capital ratio: 9.61% (down from 10.13%)
• Total capital ratio: 12.64% (down from 12.95%)

Despite the decline, both indicators remain within regulatory thresholds.

Credit-to-Deposit Ratio Improves

Liquidity indicators show some improvement:

• Loan-to-deposit ratio: 74.07% (down from 79.5%)
• Loan-to-deposit share: 80.07%

This reflects stronger deposit growth relative to credit expansion.

Private sector credit growth remains modest at 6.7 percent, slightly higher than the previous year’s 6.33 percent.

Inflation and Foreign Exchange Stability

Nepal’s macroeconomic indicators remain stable:

• Average inflation: 2.13% (below target of 5%)
• Foreign exchange reserves sufficient for 18.5 months of imports (well above the 7-month target)

These indicators suggest strong external sector stability.

Strong Growth in Digital Banking Users

Financial access has expanded significantly:

• Deposit accounts: 62.06 million
• Credit accounts: 2.04 million
• Mobile banking users: 29.46 million
• Internet banking users: 2.37 million

Compared to the previous year, 3.66 million new deposit accounts and over 100,000 credit accounts were added.

Digital Payments Expanding Rapidly

The rise in digital infrastructure and public adoption has driven a surge in electronic transactions.

As of Falgun 2082:

• 8 payment system operators
• 21 payment service providers

These institutions are supporting the rapid shift toward cashless financial transactions.

Policy Measures and Regulatory Updates

The Economic Survey also highlights several regulatory reforms introduced by Nepal Rastra Bank, including:

• Increase in housing loan ceiling from NPR 20 million to NPR 30 million
• Higher loan-to-value ratios for first-home buyers
• Revised interest rate structures for priority agricultural projects
• Increased overdraft loan limit to NPR 10 million
• Removal of single borrower limit on margin loans against shares
• Revised CSR guidelines targeting low-income groups

These measures aim to stimulate credit flow, support productive sectors, and enhance financial inclusion.

While Nepal’s financial system remains broadly stable with strong liquidity and adequate capital buffers, rising NPLs and weak credit demand reflect underlying economic challenges.

The government is expected to focus on strengthening credit growth, improving financial sector efficiency, and addressing structural liquidity imbalances in the upcoming fiscal policies.