Domestic Credit Growth Slows: Risks to Investment in Nepal

Published on September 24, 2025

Domestic credit is a crucial engine for investment and economic expansion, as it reflects the flow of funds from banks and financial institutions into businesses, households, and the government. In Nepal, however, domestic credit growth has slowed considerably in recent years, raising concerns about its impact on investment. After growing by a robust 27.1% in FY 2020/21—a post-pandemic rebound fueled by liquidity injections and rising demand—credit growth dropped sharply to 14.5% in FY 2021/22, then further to 8.9% in FY 2022/23, and only 6.1% in FY 2023/24. By FY 2024/25, it grew just 6.2%, and mid-August 2082/83 data shows an even weaker pace of 5.4% year-on-year.

This slowdown has direct implications for Nepal’s investment climate. Weak credit expansion suggests that businesses are not borrowing enough to finance new projects, expand capacity, or invest in innovation. Households, too, are more cautious about borrowing, given subdued income growth and concerns over repayment capacity. At the same time, banks, flush with deposits from strong remittance inflows, are struggling to channel funds into productive lending. This mismatch—ample liquidity but weak credit demand—points to a lack of investor confidence and a sluggish private sector.

The risks are significant. With Gross Fixed Capital Formation already declining to 24.1% of GDP in FY 2024/25, reduced credit growth could further weaken investment momentum. Infrastructure projects, manufacturing expansion, and small business financing may all face bottlenecks, slowing job creation and economic diversification. If this trend persists, Nepal could remain locked in a cycle where remittances fuel consumption and deposits, but investment—critical for long-term growth—remains constrained.

From a policy standpoint, the challenge lies in stimulating productive credit demand without encouraging excessive risk-taking. This requires improving the business climate, reducing bureaucratic barriers, offering incentives for SMEs, and directing lending toward sectors like hydropower, agro-processing, and IT that can generate sustainable returns. Unless domestic credit growth revives, Nepal risks falling short of its growth potential despite having strong liquidity buffers.

Policy Lessons from India: Can Nepal Control Inflation More Effectively?

India has kept inflation relatively moderate through strong agricultural systems, buffer stocks, and inflation-targeting policies, while Nepal has historically struggled with food-driven volatility. Nepal’s CPI fell below India’s in 2025/26 for the first time in four years, but to sustain this trend, Nepal must strengthen supply chains, adopt buffer policies, and set clearer inflation targets.

Inflation Convergence in South Asia: What Nepal-India CPI Data Reveals

Nepal and India’s inflation rates, once far apart, have gradually converged—Nepal’s CPI dropping from 7.74% in 2022/23 to 1.68% in 2025/26, while India’s remained steadier around 2–5%. For the first time in four years, Nepal’s inflation fell below India’s, highlighting both shared regional cycles and unique domestic vulnerabilities.

Nepal vs India: Monthly CPI Comparison and Regional Economic Impact

Nepal’s inflation fell to 1.68% in August 2025/26, below India’s 2.07%, reversing a four-year trend. While both economies share similar seasonal inflation cycles, Nepal’s sharper food-driven spikes contrast with India’s steadier, monsoon-driven patterns. Regionally, this convergence impacts household costs, trade competitiveness, and economic stability.

Inflation Gap Narrows: Nepal’s Deviation with India Falls to -0.39% in 2025/26

In August 2025/26, Nepal’s CPI stood at 1.68%, lower than India’s 2.07%, with the inflation deviation dropping to -0.39% for the first time in four years. While Nepal gained from falling food prices, India’s inflation stayed higher due to agricultural pressures, though both countries continue to face rising service costs.

Cross-Border Inflation Trends: How Nepal and India’s Prices Move Together and Apart

Nepal and India’s inflation trends usually move in sync, reflecting shared regional and global factors. But in August 2025/26, Nepal’s inflation (1.68%) fell below India’s (2.07%) for the first time in four years, thanks to easing food prices in Nepal, while India faced higher agricultural pressures.

Nepal vs India Inflation 2025/26: Why Nepal’s CPI Fell Below India’s for the First Time

In August 2025/26, Nepal’s inflation dropped to 1.68%, falling below India’s 2.07% for the first time in four years. While food price declines drove Nepal’s slowdown, India’s inflation held slightly higher due to agricultural pressures. However, Nepal’s service costs remain a long-term challenge, even as headline CPI looks favorable.