The growth rate of private sector credit in Nepal is higher in comparison to other South Asian countries. A new report by Nepal Rastra Bank shows the average year-on-year growth rate of private sector credit in the last six years in Nepal is around 21 percent while the credit growth of India is 9 percent and that of Bangladesh and Pakistan is 13 percent. The report titled “Private Sector Credit Growth and Its Impact Upon Real Sectors in Nepalese Economy” says the growth rate of credit in Nepal was higher than its neighboring countries almost all the time, even during the period of the Covid-19 pandemic. According to the report, the growth rate of private sector credit is highly volatile in Nepal followed by Pakistan, whereas it is more or less volatile in India and Bangladesh.

The report says most of the loan is collateralized by fixed assets, especially real estate. About 87 percent of the banks and financial institutions’ (BFIs) outstanding loan is backed by the asset guarantee, and the rest of 12.6 percent is backed by other collateral. Of the total credit, 75 percent of the credit is collateralized by fixed assets, and 12 percent is collateralized by current assets.

As of July 2022, the highest portion of the credit is occupied by term loans; accounting for 25.4 percent followed by demand and other working capital loans with 21.5 percent. Overdraft loans and other products are also holding a significant portion of total credit having 15.4 percent and 11.9 percent respectively. “The top-most four types of credit products occupy about three-fourths share of the total outstanding loan,” says the report. More than one-fourth of the total credit portfolio falls under non-specific purpose loans (overdraft and other products). The credit portfolio of term loans and demand & working capital loans shows a quiet reversal pattern before and after the Covid-19 pandemic with a significant rise in term loans. In order to mitigate the potential damage during the Covid-19 pandemic, the NRB encouraged businesses to borrow, increased the limit of borrowing from the same collateral, and rescheduled and restructured their loans. As a result, term loans increased significantly. Since the last decade, the credit to the private sector has shifted its dynamism, and the credit to corporations has exceeded the credit to households. Since 2010, the credit to corporations is higher than the households. The gap has widened especially after 2018. This coincided with the implementation of federal structure in Nepal, and the policy of NRB to expand financial access through the establishment of at least a branch at each level. As of July 2022, almost two-thirds of the outstanding credit has been used by corporations.