Credit disbursement by banks and financial institutions picked up sharply in the first quarter of the current fiscal year, but Nepal’s banking system continues to sit on a massive surplus of loanable funds, reflecting weak credit absorption despite strong deposit growth.

Nepal Rastra Bank data show that banks and financial institutions extended an additional Rs133 billion in credit between July 17 and October 11, more than four times the Rs30 billion increase recorded during the same period last fiscal year.

However, bankers and financial analysts caution that the surge does not necessarily signal a broad-based economic recovery. Much of the increase appears to be driven by higher import costs, a stronger US dollar, and seasonal borrowing ahead of major festivals, rather than a significant expansion in industrial production and investment.

The country’s import figures offer some support for this assessment, as businesses need more money to finance imports when the prices of goods rise and the rupee depreciates.

The latest credit expansion is the highest recorded for the first quarter over the past five fiscal years, according to data compiled by Kantipur. Banks’ additional lending stood at Rs15 billion in the first quarter of fiscal year 2022-23, before rising to Rs73 billion in 2023-24 and Rs107 billion in 2024-25.

Credit growth in the first quarter of the last fiscal year was exceptionally weak, as economic activity was severely disrupted by the September Gen Z protests, which left 76 people dead and caused property damage worth around Rs84.45 billion.

This year’s increase, therefore, comes against a particularly low base. While lending has gained momentum, the extent to which the improvement reflects stronger underlying economic activity remains uncertain.

Nepali bankers say credit demand has increased across several sectors, including import financing, small and medium enterprises, hydropower, share-backed lending, real estate, and manufacturing. However, trade financing remains a major contributor to the expansion.

“The opening of letters of credit (LC) for imports have gathered momentum in recent months,” said Santosh Koirala, president of the Nepal Bankers’ Association.

“A major portion of the expanded credit is tied to trade financing. However, we are also observing increased credit demand across small and medium enterprises (SMEs), hydropower projects, margin lending against shares, real estate, and manufacturing sectors.”

A chief financial officer of a commercial bank, who requested anonymity, said letters of credit issued by commercial banks had increased by an average of 20 percent between mid-June and October 14.

“There has been visible improvement in vehicle, real estate, hydropower, and gold-collateralised loans,” the official said.

Nabil, Global IME, Kumari, Everest, and Laxmi Sunrise were among the banks that disbursed higher volumes of credit.

Rajesh Kumar Agrawal, former president of the Confederation of Nepalese Industries, said industrial credit demand had not increased significantly during the first two months of the current fiscal year, although borrowing had improved in other areas.

“The report by the National Statistics Office, the country’s statistical agency, itself highlights that the condition of the industrial sector has further deteriorated,” he said. “In the banking and financial sector, however, loan demand appears to have picked up in areas such as real estate, vehicles, and share lending.”

Financial analysts and senior bankers say the headline credit growth figures should be treated cautiously until stronger lending translates into sustained investment, production, and economic activity.

Parashuram Kunwar Chhetri, a former banker and financial sector analyst, identified two major factors behind the increase in credit: rising prices in domestic and international markets and the appreciation of the US dollar.

“Because of rising prices and a stronger dollar, traders are required to secure higher credit amounts simply to import the same volume of goods as before,” he said. “This increase in costs inflates credit figures without necessarily indicating an expansion in real economic output.”

Festive demand lifts borrowing

Seasonal demand has also contributed to the rise in lending. Dashain, Tihar and Chhath traditionally stimulate borrowing as businesses stock up on goods, retailers prepare for higher sales and households increase spending.

Last year’s festive season was overshadowed by the Gen Z protest and its economic fallout. This year, the return of seasonal demand has encouraged businesses to seek additional financing.

Devendra Raman Khanal, chief executive officer of state-owned Rastriya Banijya Bank, said demand for large corporate loans remained subdued, even as borrowing for imports and smaller businesses increased.

“However, we have witnessed an encouraging rise in demand for import-focused letters of credit and loans targeted at micro-, small-, and medium-sized enterprises,” he said. “These demands just came ahead of Nepal’s key festive season.”

Festivals are more than cultural celebrations in Nepal; they are also a major driver of economic activity.

Consumption accounts for around 90 percent of Nepal’s GDP, and the Dashain, Tihar, and Chhath period is estimated to account for about 20 percent of annual consumption. The festive season provides a significant boost to retail, tourism, and trade within a relatively short period.

Khanal said the first-quarter credit growth offered early signs of economic recovery, although its sustainability would depend on developments in the coming months.

“We anticipate further movement after Dashain, as previously sanctioned loans are disbursed and government capital expenditure accelerates,” he said.

For the past three fiscal years, Nepal Rastra Bank had set an annual private sector credit growth target of around 12 percent, but actual growth struggled to exceed 6 percent amid weak investor confidence and prolonged economic deceleration. For the current fiscal year, the bank has set a lower target of 11 percent.

Govinda Ghimire, chief executive officer of NMB Bank, said the expansion of the economy had also contributed to borrowing requirements, alongside increased imports of consumer goods for the festive season.

“Furthermore, the total size of the national economy has expanded compared to previous years, which naturally pushes up baseline credit requirements.”

However, he cautioned against interpreting the increase as evidence that credit demand had fully recovered.

Banks are currently finalising their first-quarter financial statements, which are expected to provide a more detailed breakdown of sectoral lendings, he said.

Rs1.56 trillion in loanable funds remains unused

Despite the pickup in lending, Nepal’s banking system continues to hold a substantial surplus of loanable funds, as deposits are growing faster than banks can expand credit.

As of October 11, total deposits at banks and financial institutions stood at Rs8.51 trillion, while total outstanding credit amounted to Rs6.07 trillion. The credit-to-deposit ratio stood at 70.79 percent.

The credit-to-deposit ratio measures how much of the money banks collect as deposits has been lent to borrowers. A lower ratio indicates that a relatively smaller share of deposits has been converted into loans.

Under Nepal Rastra Bank regulations, banks and financial institutions are allowed to maintain a maximum credit-to-deposit ratio of 90 percent. They must also maintain prescribed liquidity buffers to meet withdrawals and other obligations, limiting the funds available for lending.

Based on these parameters, the banking system had an estimated Rs1.56 trillion in surplus loanable funds as of October 11. The amount was higher than the Rs1.17 trillion recorded during the same period last year, although it was slightly below the Rs1.58 trillion recorded at the end of the last fiscal year in mid-July.

The persistent surplus indicates that banks have ample funds to lend but that demand for credit has not been strong enough to absorb them fully.

Central bank officials attribute the excess liquidity to strong inflows from the external sector, alongside relatively moderate domestic credit demand.

“Annual point-to-point credit growth stood at around 7 percent at the end of the second month of the current fiscal year,” said Guru Prasad Paudel, spokesperson for the Nepal Rastra Bank.

“Credit expansion needs to be accelerated further. Given the current interest rate environment, comfortable liquidity conditions, and the requirements of the economy, we anticipate loan disbursements to pick up momentum in the coming months.”

Remittances fuel deposit growth

Strong deposit inflows, driven largely by remittances, have further increased liquidity in the banking system.

Deposits rose by Rs204 billion during the first quarter of the current fiscal year through October 11, compared with an increase of Rs138 billion during the same period of the previous fiscal year.

The latest quarterly increase is the highest in five years. Deposit growth stood at Rs119 billion in the first quarter of 2024-25, Rs76 billion in 2023-24, and Rs67 billion in 2022-23.

Banking experts say steady remittance inflows have been a major source of deposits, adding to the funds available for lending. But the continued accumulation of deposits alongside relatively modest credit growth points to the difficulty banks face in channeling available money into productive economic activities.