News Summary
- Since mid-July of this fiscal year until September 4, commercial banks have increased loans by over NPR 4.3 billion.
- According to the Bankers’ Association, festive seasons, relaxed loan policies, and new projects in the hotel and hydropower sectors have driven loan demand growth.
- By September 4, the average loan-to-deposit ratio of banks reached 70.65 percent.
September 13, Kathmandu — Demand for loans at banks appears to be rising. As the festive season approaches this year, there has been an improvement in loan demand.
Since the start of the current fiscal year, commercial banks have disbursed NPR 41 billion in loans. Of the 20 operating commercial banks, there was a negative loan investment of NPR 200 million in July, but by September 4, loan investments increased by NPR 4.3 billion.
Banks had anticipated an increase in loan investment compared to last year from the beginning of this fiscal year. According to the Nepal Bankers’ Association, loan disbursement has been expanding. In the previous fiscal year, loan investments fell by NPR 1.1 billion in July but rose by NPR 4.3 billion in August.
From mid-2021 to early 2024, foreign exchange reserves continuously declined. During that period, the government even restricted imports of luxury goods. The COVID-19 pandemic and dwindling foreign reserves led the economy into recession. Reduced overall demand caused economic activities to drop, creating excess liquidity in the financial sector and reducing loan demand.
However, recently, Nepal Rastra Bank has relaxed lending policies and new projects have begun in the hotel and hydropower sectors, leading banks to forecast increased loan disbursements this fiscal year. Sudesh Khaling, CEO of Everest Bank, noted that loan growth in the first two months of this fiscal year has exceeded last year’s levels.
In the previous fiscal year, private sector loans from banks and financial institutions increased by NPR 359.36 billion, a 6.5 percent growth rate. The central bank had anticipated a 12 percent increase.
The central bank attributed the lower-than-target growth to a sluggish economy and reduced demand, completing only half of the loan investment targets. For this fiscal year, it has set an 11 percent expansion target for private sector lending. Nonetheless, loan investments are expected to rise compared to the previous year.
“Loan demand has particularly increased in the under-construction hydropower and hotel sectors,” Khaling said. “September and October are peak loan expansion seasons, coinciding with the festive period when imports also rise.”
Loans are also expected to increase due to the September 26 flood in Rasuwa. If the government increases capital expenditure for reconstruction in that area, loan disbursement should rise as per central bank targets.
With the government increasing capital spending, cement and steel production will also grow, necessitating expansion of production capacity and thus increasing loan demand. Khaling analyzed that rising imports will further stimulate loan disbursement. He added, “Loan growth tends to spike in the last month of each quarter, while the first month usually sees a downward trend.”
The Rasuwa flood has also helped boost both deposits and loans within the financial system. Foreign aid inflows will increase deposits further, he noted. “This time, government spending will drive higher loan demand, stimulate economic activity, and boost consumption.”
Most loans being disbursed are previously approved. Given the massive reconstruction needs after the Rasuwa flood, the central bank’s relaxed lending policies, excess liquidity, and reduced interest rates, the potential for increased loan disbursement is high.
By September 4 this fiscal year, deposits of commercial banks increased by NPR 6.4 billion, while loans rose by NPR 4.3 billion.
By that date, banks’ average loan-to-deposit ratio stood at 70.65 percent. Banks have the capacity to raise this ratio to 90 percent. To date, total bank deposits have reached NPR 7.54 trillion.
Meanwhile, loan investments have reached NPR 5.33 trillion, according to the Bankers’ Association. However, Nepal Rastra Bank reported that by September 8, total deposits of banks and financial institutions reached NPR 8.33 trillion, while loans had increased to NPR 5.998 trillion.
During this period, the average loan-to-deposit ratio of banking and financial institutions was 71.35 percent, the central bank said.