Nepal’s Banks Have Plenty of Money. The Harder Question Is Who Can Access It

Kathmandu — Nepal’s banking system is awash with liquidity, interest rates have fallen sharply and deposits continue to rise. Yet the flow of credit into the real economy remains weak, raising a more fundamental question than whether banks have enough money to lend: how efficiently, fairly and productively is that money being allocated?

The latest indicators point to a widening gap between money available in the banking system and money actually being deployed as credit. Nepal Rastra Bank’s eleven-month indicators show private-sector credit growing by only 6.4 percent, while broad money expanded by 14.2 percent. The weighted average lending rate of commercial banks had fallen to 6.64 percent, while their average deposit rate stood at 3.29 percent.

More recent daily banking indicators make the imbalance even clearer. By mid-July, total deposits at banks and financial institutions were around Rs 8.29 trillion, compared with lending of roughly Rs 5.92 trillion. The system-wide credit-to-deposit ratio was below 71 percent, indicating substantial unused lending capacity.

NRB itself describes the banking system as having ample liquidity and low market interest rates while credit growth remains constrained. At the same time, the regulator has warned of deteriorating asset quality, pressure on bank capital and reduced profitability.

These numbers weaken one common explanation for Nepal’s sluggish investment—that credit is simply too expensive or that banks lack funds.

Money is available, and borrowing costs have fallen. The more difficult problems appear to lie in credit risk, borrower confidence, the structure of lending and the way banks assess who is considered creditworthy.

Land still determines who gets credit

Perhaps the clearest evidence of Nepal’s structural banking problem is found in collateral.

As of mid-May 2026, 63.5 percent of all outstanding bank and financial institution credit was secured against land and buildings. Only 14.9 percent was backed by current assets such as agricultural and non-agricultural products.

That dependence has consequences far beyond real estate.

An established business owner with valuable land can often provide the security banks understand best. A new entrepreneur may have a viable product, strong future cash flow and a promising market but little property to pledge.

The existing system therefore risks confusing collateral strength with business strength.

That does not mean banks should abandon collateral. Banks lend depositors’ money and have a legal and commercial obligation to manage risk. But when nearly two-thirds of lending is secured against land and buildings, asset-light businesses can face a structural disadvantage.

This is particularly important for startups, technology firms, small manufacturers and younger entrepreneurs whose value may lie in intellectual property, contracts, skills or future revenue rather than property ownership.

NRB appears to recognise the problem. Its monetary policy has called on banks to give greater attention to the borrower’s project, knowledge, skills and capacity. It has also proposed allowing lending based on customer credit scores and facilitating digital lending to micro, small and medium enterprises on the basis of electronic transactions.

The direction is significant. It represents a gradual shift away from asking only “What property can you mortgage?” toward asking “Can this business generate enough cash to repay the loan?”

Credit growth is not evenly reaching productive sectors

The sectoral lending figures provide another warning.

During the first ten months of 2025/26, outstanding credit to construction increased 12.8 percent, consumer-related credit 12.3 percent and lending to transportation, communication and the public sector 10.9 percent. Credit to industrial production grew by a more modest 6.8 percent, while service-sector lending rose 3.3 percent. Credit to agriculture actually fell 2.3 percent.

These figures do not prove that banks are systematically avoiding productive businesses. Construction itself can be productive, and consumer credit can support economic activity.

But they show that simply measuring total credit growth is insufficient.

The more important questions are where the money goes, what economic activity it creates and whether the financed projects generate enough income to service the debt.

If a banking system expands loans but fails to create corresponding productive capacity, employment or export earnings, credit growth alone cannot be treated as economic progress.

The ‘big business ATM’ argument needs more evidence

There is widespread concern in Nepal about the overlap between banking ownership, large corporate groups and businesses operating across sectors such as manufacturing, insurance, hotels, trading and construction.

That concern deserves regulatory attention, but it should not be converted into an allegation that the entire banking system is simply financing a small group of conglomerates without evidence.

Nepalese law already places restrictions on connected lending.

The Banks and Financial Institutions Act prohibits banks from extending certain credit facilities to directors, chief executives, shareholders holding one percent or more of paid-up capital, their family members and businesses in which relevant persons have significant financial interests. It also restricts exposure to a single customer or group beyond limits prescribed by NRB.

The more troubling issue is whether those rules can always be monitored effectively.

NRB’s latest Bank Supervision Report identifies weaknesses precisely in this area. The regulator found problems in grouping related-party loans for Single Obligor Limit monitoring, as well as inconsistencies in borrower names, duplicate customer IDs and missing tax identification data for large exposures. Such deficiencies can make it harder for supervisors to establish the true exposure of interconnected borrowers.

The report goes further. NRB said it observed some instances in which loan proceeds were transferred to directors’ or related parties’ accounts immediately after disbursement. It also identified practices involving potential loan rollovers and deficiencies in reassessing borrowers during restructuring.

Those findings make concerns over governance and connected lending legitimate.

But they still do not establish that every major borrower, business group or bank is involved in such practices. The appropriate conclusion is that the regulatory system needs stronger visibility over group exposures and end-use of credit, not that all large corporate lending is improper.

Banks have also become more cautious for a reason

Another weakness in the original argument is the assumption that banks can safely solve the problem simply by lending more.

They cannot.

The non-performing loan ratio of banks and financial institutions reached 5.60 percent by mid-April 2026. NRB says declining asset quality is putting pressure on capital and profitability.

Banks facing more bad loans naturally become more selective.

If they loosen standards simply because liquidity is abundant, Nepal risks transforming today's excess liquidity into tomorrow's non-performing loans.

This is why the central question should not be how to force banks to lend more, but how to create more bankable productive projects and improve the quality of credit assessment.

NRB inspections have already identified examples of weak credit practices, including lending beyond drawing power, inadequate monitoring of collateral, questionable restructuring and practices suggestive of loan rollover.

That makes indiscriminate credit expansion particularly risky.

Falling rates have not solved the investment problem

The current interest-rate environment also challenges another common assumption.

Commercial banks’ weighted average lending rate had fallen to 6.64 percent by mid-June, according to NRB indicators. Yet private-sector credit growth remained only 6.4 percent.

This suggests that lowering interest rates alone is unlikely to revive investment.

Businesses also respond to expected demand, political and regulatory stability, repayment prospects, infrastructure, taxation, market competition and confidence about future returns.

A company will not borrow merely because money is cheap if it does not expect sufficient demand for what it produces.

Similarly, a bank will not lend merely because it has excess funds if it believes the borrower may default.

The weakness in credit growth is therefore both a supply-side banking problem and a demand-side economic problem.

Small businesses face a different financing problem

For a large established company, the central concern may be the cost of borrowing.

For a small entrepreneur, the first challenge may simply be qualifying for a loan.

Property valuation, mortgage registration, documentation requirements, service charges and collateral requirements can represent disproportionately high costs for relatively small loans.

A Rs 2 million borrower and a Rs 2 billion borrower do not experience these fixed administrative costs in the same way.

That is why simplifying SME credit cannot mean simply ordering banks to approve more applications.

Nepal needs better credit information, digital transaction histories, reliable financial statements, credit-scoring systems and guarantee mechanisms that allow banks to evaluate risk without demanding property for every viable business.

NRB’s decision to move gradually toward credit-score-based lending and electronic-transaction-based financing for MSMEs addresses precisely this problem.

If implemented effectively, such systems could give commercially viable but asset-poor entrepreneurs access to formal finance.

Crisis restructuring requires discipline

The argument that banks should help distressed industries survive rather than immediately enforce collateral also has merit—but only up to a point.

A viable business temporarily damaged by an earthquake, recession or extraordinary shock may recover if its loan is rescheduled or restructured.

Closing such a company prematurely can destroy jobs, reduce tax revenue and ultimately increase the bank’s own losses.

But repeated restructuring of businesses that are no longer economically viable creates the opposite problem.

It can hide bad loans, postpone recognition of losses and keep capital trapped in companies that cannot repay.

NRB’s supervision report has already identified cases where restructuring and rescheduling were carried out without adequate reassessment of borrowers’ action plans, collateral or going-concern status.

The correct principle is therefore not “save every industry” but “restructure viable businesses and recognise losses quickly where recovery is unrealistic.”

Productive lending cannot be defined too narrowly

Calls to redirect bank lending toward production are also attractive but need careful design.

Agriculture, manufacturing, energy, tourism and export businesses can generate employment and foreign exchange. But a loan should not automatically be considered good merely because regulators label its sector “productive.”

A badly designed factory is still a bad loan.

Likewise, services, logistics, information technology and commercial infrastructure can make substantial contributions to productivity even though they do not manufacture physical goods.

The objective should therefore be productive use of capital, rather than an administratively rigid distinction between favoured and unfavoured sectors.

The real reform is better allocation of risk

Nepal’s banking debate is ultimately moving beyond the question of whether banks are profitable.

Banks are private commercial institutions and profit is necessary for them to remain solvent, protect depositors and build capital.

But banking is not an ordinary private business. Its principal raw material is money entrusted by millions of depositors, and its failure can impose costs on the entire economy.

That gives regulators a legitimate interest in how banks manage concentration risk, connected lending, corporate governance and credit allocation.

NRB’s own supervision findings demonstrate that regulatory compliance cannot be taken for granted. The central bank reported systematic reporting discrepancies, problems in tracking related borrowers, instances of regulatory arbitrage and cases where loan proceeds were diverted toward related accounts.

At the same time, BAFIA already contains legal safeguards against lending to directors and related interests and against excessive single-borrower exposure.

The gap, therefore, is increasingly one of implementation, data quality and supervision, not simply absence of regulation.

Nepal needs better credit, not merely more credit

The way forward is unlikely to come from a single policy intervention.

Banks need stronger cash-flow and project appraisal capacity. Credit bureaus and scoring systems must become more sophisticated. SME documentation needs to become simpler without weakening risk controls. Credit guarantees can support viable borrowers who lack collateral, but guarantees must not become a mechanism for transferring private credit losses to taxpayers.

Interest rates should remain transparent and linked to clearly disclosed benchmarks, but policymakers should recognise that today's weak lending cannot be blamed primarily on expensive credit when average commercial-bank rates have already fallen substantially.

Regulators also need a more complete view of business groups so that loans made through different companies and legal entities can be aggregated correctly when measuring concentration and connected exposure.

Most importantly, Nepal needs to move from a banking culture dominated by asset-backed lending toward one that can reliably assess cash flow, management quality, project viability and repayment capacity.

That transition will not happen overnight.

Collateral is simple to understand and relatively easy to enforce. Cash-flow lending requires better accounting, stronger financial disclosure, competent bankers, reliable credit data and courts capable of resolving commercial disputes efficiently.

But without that transition, Nepal risks maintaining a paradoxical financial system: one with abundant deposits and low interest rates, yet one in which a capable entrepreneur without land may still find finance difficult to obtain.

The real measure of banking success should therefore extend beyond profits, deposit growth or balance-sheet size.

The questions that matter are harder: Who receives credit? What economic activity does that credit finance? Does it raise productivity? Does it generate employment? Can the borrower repay from business income rather than the sale of collateral? And are large exposures monitored transparently and consistently?

Nepal does not need banks to become charities, nor should banks be compelled to finance commercially weak projects in the name of national development.

What it needs is a banking system in which viable businesses can compete for finance on the basis of capacity and economic potential, while connected lending and concentration risks are rigorously controlled.

The central issue is therefore no longer simply how much money Nepal’s banks hold.

It is how intelligently and fairly that money is transformed into productive economic activity.