14-Year Private Sector Credit Growth Trends: A Historical Perspective

Kathmandu, Nepal – The private sector credit growth in Nepal has slowed significantly in the fiscal year 2023/24, recording a modest increase of 5.75%, according to the latest financial data. The total private sector credit reached NPR 5.2 trillion (520,249.5 ten million), reflecting the ongoing economic slowdown and cautious lending practices by banks and financial institutions.

This growth rate marks a continued downward trend compared to 2022/23, when credit expansion stood at 4.37%. In stark contrast, private sector credit had surged by 20.84% in 2020/21, showing a robust post-pandemic recovery. However, the declining trend over the past three years raises concerns over the liquidity situation and the investment climate in the country.

Reasons Behind the Slowdown

High Interest Rates: Nepal Rastra Bank (NRB) has tightened monetary policy to control inflation, leading to increased borrowing costs. Higher interest rates discourage businesses from taking loans for expansion.
Liquidity Crisis in Banks: Financial institutions are facing liquidity shortages, limiting their ability to lend freely. The liquidity crunch has forced banks to be more selective in approving new loans.
Reduced Business Confidence: Uncertainty in the stock market, real estate slowdown, and a struggling industrial sector have weakened demand for credit. Many businesses are hesitant to take on new debt amid economic instability.
Declining Investments in Key Sectors: Sectors like manufacturing, trade, and infrastructure development have seen reduced credit uptake, affecting overall economic growth.
Banking Sector Reforms: Stricter capital requirements, regulatory interventions, and risk-management measures have made banks more cautious in lending.

Impact on Nepal’s Economy

The slowdown in private sector credit growth could have significant implications for Nepal’s economic outlook.

Reduced Investments: Businesses rely on bank credit for expansion, infrastructure development, and working capital. A slowdown in credit availability means fewer investments and lower economic activity.
Job Market Challenges: Fewer loans for businesses lead to reduced hiring and slower job creation, affecting employment opportunities.
Lower GDP Growth: A sluggish credit market often translates into slower GDP growth, as businesses struggle to expand and consumers cut back on spending.

Economic experts warn that unless liquidity improves and borrowing costs stabilize, the private sector may continue to face credit constraints, further slowing down economic growth.

Historical Context: A Look Back at Nepal’s Credit Boom

Nepal’s private sector credit has witnessed rapid expansion over the past two decades. One of the highest growth rates was recorded in 2009/10, when private sector credit grew by a staggering 57.17%. This period saw aggressive lending and expansion in various industries.

However, after 2021/22, growth rates have declined sharply, signaling a shift in economic conditions and regulatory approaches.

Government and NRB’s Response

In response to the slowdown, Nepal Rastra Bank has been working on monetary policy adjustments to balance economic growth with financial stability. While controlling inflation remains a top priority, policymakers are exploring ways to ensure that businesses and industries continue to receive the financial support needed for growth.

Potential measures that could be introduced include:

Lowering Interest Rates to encourage borrowing and investment.
Providing Liquidity Support to banks and financial institutions.
Introducing Credit Incentives for key industries like manufacturing, hydropower, and tourism.

Future Outlook: What Lies Ahead?

As Nepal enters the new fiscal year, economic analysts believe that much depends on global economic conditions, banking sector reforms, and government policies to stimulate investment.

If liquidity challenges persist and interest rates remain high, Nepal’s private sector growth may continue to struggle in the coming years. However, if corrective measures are implemented effectively, credit expansion could regain momentum, helping businesses grow and boosting economic recovery.

For now, businesses and financial institutions remain cautious, watching how Nepal Rastra Bank and the government navigate the current economic landscape.