KATHMANDU, Feb 17: Faced with increasing bad loans, Nepal's Banks and Financial Institutions (BFIs) are showing a clear preference for issuing consumption-related loans over production-based credit to minimize recovery risks.
A report released by the Banks and Financial Institutions Regulation Department of Nepal Rastra Bank (NRB) reveals that BFIs had disbursed Rs 1.261 trillion in consumption loans by mid-January of the current fiscal year. This sector saw a significant inflow of over Rs 51 billion in just one month between mid-December and mid-January.
Revised interest rate corridor system introduced
In contrast, credit disbursed to agriculture, forestry, and production-related activities (including beverages and non-food items) stood at a comparatively lower Rs 965.25 billion. Furthermore, loans for wholesale and retail trade reached Rs 1.040 trillion, suggesting that a substantial portion of bank credit is financing imported goods rather than bolstering domestic production.
The NRB report indicates that the primary sector, including agriculture, remains a low priority for lenders. Credit to agriculture and forestry stood at a mere Rs 354.79 billion during the review period, a decline from Rs 369.62 billion two years ago. Between mid-December and mid-January, this figure increased by only a marginal Rs 3 billion.
While the overall financial access in the country appears to be growing—with the deposit-to-GDP ratio at 126.47 percent and the loan-to-GDP ratio at 94.86 percent—NRB statistics highlight significant regional disparities. Bagmati Province is home to 2,279 BFI branches, serving approximately 2,684 people per branch. In contrast, Karnali Province has only 243 branches, with a much higher ratio of 6,948 people per branch.
As of mid-January, the national non-performing loan (NPL) ratio, or bad loan, has reached 5.42 percent of total credit. A breakdown shows 'C' class finance companies are struggling the most with an 11.86 percent bad loan ratio, followed by 'B' class development banks at 5.75 percent, and 'A' class commercial banks at 5.26 percent.
To cover these potential losses, BFIs have allocated 5.83 percent of their total loans for loss provisions. This significant provisioning is putting increasing pressure on their profitability and their ability to maintain mandatory capital adequacy ratios.
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