Nepal’s economy is perking up. Real GDP growth hit 4.8 percent in the third quarter of the current fiscal year, up from 3.7 percent the year before. The monsoon arrived on time. Tourists have returned and Thamel’s shopkeepers have resumed their cheerful haggling in multiple currencies. Hydropower exports to Bangladesh have begun. Even construction, usually a source of economic lethargy, is stirring as marquee infrastructure projects near completion. Against this backdrop the Nepal Rastra Bank is easing monetary policy, lowering its benchmark rates and loosening regulatory screws. But though the economy looks sturdier from the outside, the financial system underpinning it remains worryingly brittle.
The central bank has cut its policy rate from 5 percent to 4.5 percent. It hopes to sustain the nascent recovery by propping up credit and keeping liquidity ample. Moreover loan loss provisions on performing loans have been trimmed. Risk weights for margin-type loans have been cut. Capital adequacy requirements under Basel III have been frozen. Restructuring rules have been made more forgiving. Loans previously flagged as non-performing can now graduate to “standard” only after six months of scrutiny, an improvement but still indulgent by global norms. The NRB’s permissiveness is predicated on a simple hope: that access to cheaper credit will revive investment and employment, rather than fuel fresh distortions.
That is a delicate wager. Non-performing loans (NPLs) have already soared worryingly high. The blacklists of defaulters are lengthening. Banks are still burdened by non-banking assets—repossessed property and unproductive collateral—gathering dust on their balance sheets. Credit expansion is tepid notwithstanding low rates. The NRB, to its credit, is not entirely oblivious. Draft legislation to establish asset management companies is being readied. The central bank promises tighter surveillance of systemically important institutions and a renewed push towards risk-based supervision. Yet the tension persists: how to restore growth without weakening financial stability further.
Much of the current optimism rests on public works and agriculture. The government is betting higher capital expenditure across all levels—federal, provincial, local—will crowd in private investment. Hydropower projects, if completed on time, could add 1,000 megawatts a year to the grid. Major roads and tunnels, once open, should lift productivity in transport and logistics. Meanwhile improved fertiliser availability, seed subsidies and minimum support prices are expected to deliver a respectable 3.3 percent growth in agriculture. These are welcome developments. But they do little to ease the balance-sheet stress dogging the financial sector.
Thus the NRB is retooling its regulatory toolkit. Housing loan ceilings have been lifted to NPR 30 million with generous loan-to-value ratios for first-time buyers. Credit scoring models are being rolled out to make lending more scientific. Working capital norms are being aligned with sectoral realities from agriculture to education to media. SMEs can now borrow up to NPR 1 million against self-declared collateral, a possible lifeline for informal entrepreneurs. Loans in quake-hit districts have been offered restructuring options. Margin loan limits have been raised. Yet easing access without restoring lending discipline risks repeating past mistakes.
The foreign-exchange regime is being cautiously liberalised. Spending ceilings from foreign currency accounts have been relaxed. Import-related LC limits have been raised. Payment mechanisms for public procurement have been diversified. But remittance inflows, historically the country’s economic life-support, remain vulnerable. The NRB wants to channel these into productive investment. Whether it succeeds depends on trust, currently thin, in both financial instruments and institutions.
On payments and digital finance, the central bank is more assured. The architecture for a national payment switch is now in place. Public payments are migrating to digital rails. A committee of stakeholders is revisiting regulations for financial innovators. A “Neo Bank” is on the horizon. The NRB appears determined to modernise the financial ecosystem. Yet institutional capacity and regulatory coherence remain big hurdles. The proliferation of guidelines—on bank social responsibility, account freezing, microfinance risk and more—has not always translated into clarity or compliance.
Nor is the NRB spared from policy schizophrenia. On one hand it wants to promote lending to green sectors, food safety-certified businesses and tourism. On the other it is grappling with banks unwilling to lend, fearful of defaults and reputational risks. Macroprudential regulation is improving on paper. In reality the legacy of politically directed credit, overexposure to real estate and soft treatment of bad loans continues to haunt.
The wider macroeconomic picture is mildly encouraging. Economic growth, projected at 4.6 percent for the year and targeted at 6.0 percent next year, is no longer anaemic. Export diversification is slow but underway. The IT sector is attracting policy interest. Yet for Nepal to escape its low-growth, high-fragility trap, more than monetary tweaks are needed, meaning the next test will come not from interest rates but from defaults.
Easy money, heavy burdens
If credit quality deteriorates further, the NRB’s generosity may backfire. Restructuring is no substitute for reform. What the economy needs is credit that finds productive hands rather than falling rates chasing hollow collateral. Slashing interest is easy; rebuilding trust is a harder rate to cut. ■
