FOR MOST of its history the Nepal Stock Exchange (NEPSE) was not so much a stockmarket as a banking hall with a view. Financial firms (commercial banks, development banks, insurers) accounted for over half of its value. Retail investors treated bank shares as fixed-income proxies with a dividend yield and a bit of upside. The formula worked. Banks grew, paid out and absorbed capital by default, because there was nowhere else for it to go.
That default no longer makes sense. Bank shares closed the first half of the fiscal year virtually unchanged from 12 months earlier. Commercial banks are generating narrowing interest margins as the central bank’s rate corridor squeezes the spread between deposit and lending rates. Private-sector credit is growing at 8.1%, against a deposit base expanding at 14.2%. The system holds Rs7.72trn ($53.3bn) in deposits and cannot find borrowers for it. Banks are parking Rs27trn every six months at the central bank’s standing deposit facility rather than lending it into the economy.
The problem is structural rather than cyclical. Between 2020 and 2022 banks extended credit aggressively—claims on the private sector grew by over a quarter in a single year. Much of it went into real estate, share mortgages and consumer goods. When remittances softened and property values corrected, the quality of that loan book came under pressure. Concessional lending to women entrepreneurs has fallen from 71,883 borrowers to 45,005 in 18 months. These are delinquencies and write-offs.
Investors who accept that banks are no longer the anchor of a NEPSE portfolio face a different question: what replaces them? The answer, invisible to those still scanning the banking sub-index, is spread across three sectors that barely registered a decade ago.
Hydropower is the most obvious. With 97 listed companies and 15.2% of market capitalisation, it is NEPSE’s largest sector by number of listings and its most active by trading volume. The thesis rests on five pillars that no monetary-policy committee can touch. Domestic electricity demand is growing with urbanisation and electric-vehicle adoption. Wet-season surplus creates export potential to India and Bangladesh. The government has identified hydro as its industrialisation centrepiece. The project pipeline of approved plants represents multi-year revenue growth already embedded in the listed universe. And unlike banks, hydropower companies own real hard assets: rivers do not default. The sub-index is up 27% from January 2024.
Manufacturing and processing is the sleeper. Market capitalisation has grown by 35.5% in a year, the highest rate of any major sector, to Rs304.6bn. Cement, iron and steel, plastics and food processing are all drawing credit for capacity expansion. The Securities Board approved IPOs for a solar-panel manufacturer, an agro-processing firm and a cement company in the first half alone. Import substitution is an explicit government priority: Nepal imports Rs939bn in goods every six months. A 5% shift toward domestic production would represent Rs47bn in new demand for listed manufacturers.
Life insurance offers structural growth hidden inside the financial sector. Twenty-seven listed insurers now account for 13.6% of NEPSE’s value. Insurance penetration in Nepal is among South Asia’s lowest. An urbanising population with rising remittance incomes is buying life cover and pension products for the first time. Insurers hold Rs676bn in bank deposits—the largest non-individual depositor category in the system—which they deploy into bonds and equities. The life sub-index has gained 17.7% in a year.
For most retail investors, the practical question is not which stock to buy but how to get diversified exposure without the stock-picking competence that a thin, information-sparse market demands. Mutual funds offer an answer. In the first half of the fiscal year, the securities board approved Rs11.8bn in new fund issuances—more than the combined total of ordinary and rights shares. Systematic investment plans tailored for remittance-receiving households represent one of the most commercially attractive distribution opportunities in Nepal’s financial system.
NEPSE is in the early stages of a transition that most investors have not yet priced. For a decade it was effectively a banking market. That model is exhausted. What is replacing it is a market that reflects Nepal’s real endowments: its rivers, its growing industrial base, its expanding insurance pool. An investor building a portfolio today on the premise that banks are the anchor is making a category error—confusing 2015 with 2025. The portfolios that outperform over the next five years will be those built around productive assets rather than financial intermediaries. Nepal’s banks have become uninvestable. For investors willing to look elsewhere, that is not a crisis. It is a liberation. ■
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