IMAGE VIA NRB
NEPAL-RASTRA-Bank governor Biswo Nath Poudel announced the 24th monetary policy in July 2025. His summary of the situation was disarmingly accurate: “Given the low inflation and comfortable foreign exchange reserves, NRB has formulated a cautiously flexible monetary policy.” The governor, in effect, captured both the opportunity and its constraint. The conditions for stimulating growth such as cheap money and ample external cushion were all present. So was the caution that prevented them from being used fully. Eight months later, the NRB lowered its policy rate to 4.25%, the lowest level in years. Private credit growth remained, in the World Bank’s April 2026 assessment, “subdued, reflecting weak domestic demand”. The central bank cut the price of money. Nobody came to buy it.
The puzzle is not mysterious when you look at what the NRB knows about its own banking system. In May the results of a loan portfolio review of Nepal’s ten largest commercial banks (commissioned by the NRB itself) were published. The review found that the average non-performing loan ratio across those ten banks stood at 7.6%. The same banks had been reporting a system-wide NPL figure of 5.6% in their quarterly filings for the third quarter of the same fiscal year. The gap between what the banks publicly disclosed and what the regulator’s independent reviewers found reflects a practice the NRB’s own report described plainly: evergreening—the rolling over of bad loans to avoid their formal classification as non-performing, inflating apparent asset quality and suppressing provisioning requirements. Already the IMF already flagged concerns about evergreening in Nepal in its recent consultations. The loan portfolio review confirmed them.
This creates a specific kind of central-bank anxiety. The NRB is simultaneously being asked to loosen credit conditions and discovering, through its own oversight process, that a big portion of the credit already extended is not performing as classified. If it pushes banks to lend more aggressively and those new loans go to borrowers whose existing obligations are already evergreened, the NPL problem gets larger and better hidden rather than getting smaller. The regulator’s prudential instinct and the growth mandate are pulling in opposite directions, and the regulator, looking at the loan portfolio data, has reason to be cautious even when the headline numbers invite boldness.
The problem compounding this is the pass-through failure. The NRB’s August 2025 working paper, studying whether bank lending rates respond to monetary policy signals, found that 65% of Nepal’s total deposits are held in fixed-term accounts, of which 50% are institutional deposits locked in at contractually agreed rates. When the policy rate falls, banks cannot immediately lower the rates they pay on these deposits. The deposit rate stays sticky. If the deposit rate stays sticky, the margin the bank earns on new loans shrinks. And if the margin shrinks while NPLs are rising, the bank has every rational incentive to not lend: to sit on surplus liquidity and wait for conditions to improve. The credit-to-deposit ratio across Nepal’s commercial banks stood at 74.32% as of early 2026, against a regulatory ceiling of 90%. The banks have enormous headroom to lend. They are choosing not to use it.
The peg makes this worse in ways the NRB can address only at the margins. Because the Nepali rupee is fixed to the Indian rupee and the Indian rupee floats freely against the dollar, Nepal’s monetary policy is constrained in how far it can diverge from the Reserve Bank of India’s settings. In 2020, when Nepal tried to cut rates to stimulate a pandemic-stricken economy, capital reportedly began moving towards the higher rates available across the border. The NRB waited for the RBI to lead. Nepal’s average lending rate now stands at 7% against a deposit rate of 3.51%, a spread of 3.49 percentage points. That spread is not a sign of a healthy, competitive banking market channelling savings efficiently into investment. It is the margin a risk-averse sector charges to cover the uncertainty that its own bad loan portfolio has created.
The banking system itself carries the scars of a specific period of excess. Between 2017 and 2022, Nepal’s commercial banks expanded credit at rates averaging in the mid-twenties percent a year, pouring money into real estate, share collateral lending and sectors that looked profitable when economic growth was running hot. The construction sector, the hospitality sector and the hydropower project pipeline all absorbed big amounts of this credit. When growth slowed, the pandemic hit, the share market corrected from its 2021 peak above 3,200 to below 2,000, and hotel occupancy fell, the underlying loans stopped performing. The NPL ratio, which had been low as recently as 2022, crossed 5% by April 2025 and reached 7.6% in the largest banks by the NRB’s own independent assessment.
What the NRB has been trying to do since then is manage a banking sector through the aftermath of a credit cycle without triggering either a formal banking crisis or a wave of regulatory recklessness that would create the next one. Its monetary policy cuts are real. Its asset quality review is real. Its concern about evergreening is real. The reason it “remains terrified of growth” is because the last episode of growth—rapid credit expansion between 2017 and 2022—is still sitting on bank balance sheets in the form of bad loans that have not been fully resolved. The NRB knows what aggressive growth looks like in Nepal’s banking system. It has been cleaning it up for three years. Governor Poudel’s “cautiously flexible” formulation is not a failure of ambition. In fact it is an accurate description of what a regulator concludes when the evidence from its own loan portfolio review tells it that the system it is supposed to stimulate is more fragile than the published numbers suggest.
Finance minister Swarnim Wagle’s heady 7% growth target requires private credit to expand materially. The NRB has made credit cheaper. The banks are not lending. The regulator is reluctant to force them. Until the bad loans on those balance sheets are honestly recognised and resolved—a process that involves writing down assets that powerful borrowers prefer not to acknowledge—the central bank will keep cutting rates into a system that absorbs the signal without transmitting it. The puzzle is not that the NRB is timid. It is that it can read its own data. ■
