Nepal’s Loan Growth Continues Despite Weak Demand, Sectoral Disparities Emerge

Nepal’s banking and financial institutions have witnessed a sustained increase in annual loan growth, with a notable expansion in key sectors such as electricity, hotels, agriculture, real estate, consumption, and construction. According to data released by Nepal Rastra Bank (NRB), the country’s central bank, overall loan disbursement rose by 6.90% in the current fiscal year up to mid-February (Magh), despite a lack of strong demand for credit. However, while 10 out of 15 tracked sectors showed robust investment growth, five sectors experienced a contraction, raising concerns about uneven economic progress.

Loan Disbursement Reaches New Heights

The NRB statistics reveal that total loans disbursed by banks and financial institutions stood at NPR 50.88 trillion (50,88,09,63,00,000) as of mid-February last fiscal year. By the same period in the current fiscal year, an additional NPR 3.51 trillion (3,51,02,74,00,000) in loans was extended, pushing the cumulative loan portfolio to NPR 54.39 trillion (54,39,12,37,00,000). This growth in credit, which outpaces the overall economic expansion, underscores the increasing reliance on borrowing across various sectors.

Electricity Sector Leads Loan Growth

The electricity, gas, and water sector recorded the highest loan growth, surging by 21.41% year-on-year. As of mid-February this fiscal year, total lending to this sector reached NPR 4.10 trillion (4,10,37,27,00,000), up from NPR 3.38 trillion (3,38,00,00,00,000) the previous year—an increase of NPR 72.37 billion (72,37,06,70,000). Commercial banks accounted for NPR 4.01 trillion of this amount, with development banks and finance companies contributing NPR 8.58 billion and NPR 3.17 billion, respectively. This sector alone constitutes 7.57% of the total loan portfolio, reflecting Nepal’s growing investment in hydropower and energy infrastructure, a critical driver of economic development.

Hotels and Agriculture Follow Strong

The hotel and restaurant sector emerged as the second-largest recipient of credit, with loans rising by 11.12% to NPR 2.50 trillion (2,50,14,95,00,000), an increase of NPR 25.02 billion (25,02,96,00,000) from last year’s NPR 2.25 trillion. This growth aligns with the revival of tourism, bolstered by government initiatives targeting 1.6 million international visitors in FY25.

Agriculture, forestry, and beverage production, the third-ranked sector, saw a 10.12% increase in loans, reaching NPR 9.39 trillion (9,39,00,00,00,000) compared to NPR 8.52 trillion the previous year. The NPR 86.35 billion increase highlights the sector’s importance, employing over 65% of Nepal’s workforce, though productivity remains a challenge.

Real Estate and Consumption Gain Momentum

The finance, insurance, and real estate sector recorded a 9.06% rise in loans, totaling NPR 4.15 trillion (4,15,00,00,00,000), with an additional NPR 34.48 billion directed toward real estate alone. This expansion is fueled by NRB policies, including increased loan limits and reduced risk weights for first-time homebuyers, aimed at stimulating housing demand.

Consumer loans, growing by 8.99%, crossed the NPR 10 trillion mark, up from NPR 9.85 trillion last year. Bankers attribute this rise to high consumption driven by remittance inflows, with an estimated 80% of remittance funds spent on consumer goods like food, clothing, and footwear. Wholesale and retail trade, which accounts for 19.74% of total loans (NPR 10.43 trillion), remains the largest single sector by volume, reflecting strong demand for credit in everyday commerce.

Construction and Other Sectors Show Steady Growth

The construction sector saw a 6.79% increase, with loans rising to NPR 2.26 trillion from NPR 2.12 trillion, signaling a gradual recovery in infrastructure projects. Fisheries (up 3.92% to NPR 16.66 billion) and local government services also recorded modest gains, though their overall share remains small.

Five Sectors Face Loan Contraction

Despite the overall growth, five sectors experienced a decline in credit extension compared to the previous fiscal year. These include transportation, communication, and public services; mining; agriculture and forestry products; metal products, machinery, and electronics; and local government loans. The contraction ranged from a maximum of 12.5% to a minimum of 0.24%, indicating subdued activity or reduced creditworthiness in these areas.

Economist Raises Concerns Over Returns

While the volume of loans continues to grow, economist Dr. Ram Kumar Phuyal, a former senior member of the National Planning Commission, expressed skepticism about the returns on these investments. “The overall loan disbursement has increased, but the expected returns are not visible,” he remarked. Dr. Phuyal questioned whether the funds are reaching their intended targets, suggesting a need to scrutinize where the money is actually going. He advocated prioritizing productive sectors like agriculture, industry, small enterprises, impoverished farmers, and innovators over service-oriented or consumption-driven lending.

Interpretation: A Mixed Economic Picture

The 6.90% annual loan growth, though modest, signals resilience in Nepal’s financial system amid global uncertainties and domestic challenges like political instability and natural disasters. The heavy tilt toward electricity and tourism-related sectors aligns with Nepal’s long-term potential in hydropower exports and tourism revenue, both critical for reducing the trade deficit. However, the dominance of consumption and retail loans—driven by remittances—raises questions about sustainability, as these funds fuel immediate spending rather than long-term capital formation.

The contraction in five sectors, including transportation and manufacturing-related fields, points to structural weaknesses that could hinder industrial growth. Dr. Phuyal’s critique resonates with broader economic analyses, such as those from the World Bank and Asian Development Bank, which highlight Nepal’s low labor productivity and dependence on public spending and remittances rather than private investment.

As Nepal Rastra Bank continues its cautiously accommodative monetary policy—lowering the policy rate to 5.5% in FY24 and easing regulatory requirements—the challenge lies in channeling credit toward productive, job-creating sectors. With nonperforming loans rising to 3.8% by mid-2024, the banking sector’s asset quality remains a concern, potentially limiting future credit expansion if not addressed.

In summary, while Nepal’s loan growth reflects economic activity, the disparity between sectors and the lack of visible returns underscore the need for a strategic shift. Policymakers and stakeholders must balance short-term consumption with investments that promise sustainable growth, lest the country’s credit boom become a hollow victory.