The banking sector is witnessing a steady rebound in credit growth, buoyed by rising foreign trade and increased loan demand across key sectors. According to a recent report from the Nepal Rastra Bank (NRB), private sector credit from banks and financial institutions grew by seven percent, reaching Rs 5,534.77bn, during the first nine months of the current fiscal year 2024-25. This reflects a credit disbursement of Rs 361.3bn between mid-July 2024 and mid-April 2025.
Credit growth had stood at 5.1 percent in the same period of the previous fiscal year, pushing the total credit portfolio to Rs 5,167.17bn in mid-April last year. On a year-on-year basis, credit disbursement grew by 8.3 percent in mid-April.
This uptick marks a turnaround from the sluggish loan expansion seen in recent years, which had eroded bank profitability. Amid a deposit surge and subdued credit growth, the banking system was left with excess liquidity, pushing interest rates to historic lows. In mid-April, the average interest rate on loans from commercial banks fell to 8.22 percent, down from 10.55 percent a year earlier. Development banks and finance companies saw similar declines, with average lending rates dropping to 9.59 percent and 10.40 percent, respectively.
Slow credit expansion in previous fiscal years was largely attributed to the phased rollback of covid-era relief measures, including loan moratoriums and subsidized interest rates, by the central bank. As the economy stabilized, these supports were withdrawn, leading to cautious lending practices and tepid credit demand from businesses.
However, the latest data signals renewed momentum in credit expansion. Foreign trade has surged, with merchandise exports rising by 65.5 percent to Rs 188.2bn, and imports increasing by 12.2 percent to Rs 1.309trn in the nine-month period. This has triggered a spike in demand for import loans, which grew by a robust 60.6 percent by mid-April. Working capital loans and margin-based loans also recorded strong growth of 17 percent and 37.8 percent, respectively. In addition, credit expansion was driven by increased borrowing in real estate, stock market investments, and vehicle purchases.
Credit flow to the production sector rose by 9.6 percent, construction by 11.4 percent, transportation, communication and public services by 10.2 percent, and service industries by 8.6 percent. During the review period, term loans increased by 4.9 percent, margin nature loans by 37.8 percent, trust receipt (import) loans by 60.6 percent, hire purchase loans by 4.1 percent, cash credit loans by 5.2 percent and real estate loans (including residential personal home loans) by 4.9 percent.
Despite the rebound in credit activity, banks continue to grapple with excess liquidity. The banking system recorded a 5.7 percent increase in deposits, totaling Rs 368.47bn, while remittance inflows rose by 10 percent to Rs 1,191bn during the same period. This has left banks and financial institutions with a stockpile of loanable funds.
The NRB absorbed a total of Rs 17,186.15bn from the market, comprising Rs 2,212.05bn through deposit collection auctions, Rs 14,974.1bn via the Standing Deposit Facility (SDF) and Rs 2.7bn utilized under the Overnight Liquidity Facility, over the first nine months of the current fiscal year. In contrast, the central bank had absorbed Rs 766.19bn in net liquidity through various monetary operations in the same period of the previous fiscal year.
