Credit disbursement to the private sector grew at a significantly slower pace in the first quarter of the current fiscal year, reflecting subdued economic activity and weakened investor confidence. According to the Nepal Rastra Bank (NRB), banks and financial institutions (BFIs) increased lending to the private sector by just 1.5 percent to Rs 82.93bn in the first three months of 2025/26. During the same period of the previous fiscal year, private-sector lending had increased by 2.5 percent, with BFIs extending Rs 128.65bn in loans. 

As of mid-October, the total outstanding credit has reached Rs 5,580.64bn. In the review period, outstanding loans of BFIs to the construction sector increased 2.9 percent, transportation, communication and public sector by 2.4 percent, industrial production sector by 2.4 percent, consumable sector by 1.6 percent, and wholesale and retail sector by 1.4 percent. Outstanding loans to the service industry sector, however, decreased by 0.3 percent.

The slowdown in credit expansion has been attributed to the overall economic slump and the adverse investment climate following the GenZ protests of Sept 8 and 9, which created uncertainty and discouraged new business expansion. Even though interest rates have come down, demand for credit has not picked up because economic sentiment remains weak,” a banker says.

Average interest rates on loans have fallen notably compared to last year. In mid-October, average lending rates stood at 7.5 percent for commercial banks, 8.77 percent for development banks, and  10.18 percent for finance companies, down from 9.33 percent, 10.63 percent, and 11.86 percent, respectively, last year. However, lower interest rates have not spurred demand for credit from the private sector.

Commercial banks and finance companies expanded lending by only 1.6 percent each, while development banks posted an even smaller growth of 0.5 percent in the review quarter. In contrast, deposits in BFIs grew by a healthy three percent in the review period. The total outstanding deposits in the banking system have reached Rs 7,482.59bn. 

The mismatch between rising deposits and sluggish credit growth has raised concerns about pressure on banks’ profitability. With limited lending avenues, interest income of banks—the primary source of earnings for most institutions—has been falling over the past few months.

Experts say credit uptake is not growing despite ample liquidity and lower borrowing costs due to weak investor sentiment. If the government does not act now, they say, credit demand—and therefore economic recovery—may remain subdued in the coming months.