Credit picks up, but Nepal’s banks are awash with cash

When credit disbursement has “picked up,” banks are lending more money than before. It means borrowers are taking larger or more frequent loans, often to fund trade, businesses, property, or spending.

In Nepal, banks added Rs133 billion in credit between July 17 and October 11. That was more than four times the Rs30 billion increase during the same period last year. Importers needed bigger loans because goods became costlier and the rupee weakened against the US dollar.

The increase also reflects borrowing before Dashain, Tihar, and Chhath, plus demand for vehicles, real estate, hydropower, and share-backed loans. However, it does not yet prove a broad recovery: industrial demand remained weak, and banks still held surplus loanable funds. Analysts want to see whether lending leads to sustained investment and production.

Nepal’s banks extended Rs133 billion in additional credit during the first quarter, from July 17 to October 11. That was more than four times the Rs30 billion added during the same period last fiscal year, showing a sharp rebound in lending.

The increase means banks issued substantially more new loans than last year. However, much borrowing financed imports, where higher prices and a weaker rupee require more money for the same goods. Festive demand for Dashain, Tihar and Chhath also encouraged businesses to stock up.

The jump does not yet prove a broad economic recovery. Trade financing was a major driver, while industrial credit demand remained limited. Lending rose from Rs107 billion in the previous first quarter and reached a five-year high. Banks still held a large surplus of loanable funds, so sustained investment and production will determine whether momentum lasts.

Banks can lend more while holding excess cash because demand is rising only in selected areas. Strong deposits have supplied funds faster than businesses and households can absorb them. Higher credit alone does not prove stronger production or investment.

From July 17 to October 11, banks added Rs133 billion in credit, versus Rs30 billion last year. Much of it financed imports, where higher prices and a stronger dollar require more rupees for the same goods. Festival stocking for Dashain, Tihar and Chhath also lifted borrowing.

Trade financing is doing more work than industrial expansion, although bankers saw demand in SMEs, hydropower, vehicles, real estate and share-backed loans. Industrial demand stayed weak, and credit rose from a very low base after last year’s protests. The surplus therefore remains significant; analysts want sustained investment and production before calling this a recovery.

Higher import prices mean businesses need more rupees to buy the same goods. A weaker Nepali rupee and stronger US dollar make imports costlier locally. Borrowing can therefore rise because each shipment requires larger financing, not because factories produce more.

A trader importing vehicles or other goods may face higher bills while bringing in the same quantity. If banks finance those purchases through import loans or letters of credit, loan totals increase. The extra money covers exchange-rate and price increases, not necessarily new machinery, hiring, or output.

Nepal’s banks added Rs133 billion in credit between July 17 and October 11. That was over four times last year’s Rs30 billion rise. Yet trade financing remained a major driver, while analysts warned stronger lending must translate into sustained investment, production, and activity.

A letter of credit is a bank-backed payment promise to an overseas seller. The bank pays when the importer meets agreed document conditions, giving sellers confidence and importers access to goods.

For example, a Nepali vehicle trader can use an LC to buy cars from abroad. The seller ships after receiving the bank’s promise, while the trader borrows to pay later. When goods cost more or the rupee weakens against the dollar, the same shipment needs a larger loan.

Nepal’s bankers say trade financing drove much of the recent credit increase. Commercial-bank LCs rose about 20% between mid-June and October 14. Total bank credit grew Rs133 billion by October 11. This growth may reflect costlier imports and festive stockpiling, not stronger production. Analysts therefore want sustained investment and output before calling it broad recovery.

Dashain, Tihar and Chhath increased borrowing because they bring a seasonal jump in shopping. Businesses need extra money to stock goods, while households spend more as celebrations approach. This matters because credit growth can resemble recovery, even when it mainly reflects temporary festival demand.

This year, retailers sought financing ahead of the festivals, expecting stronger sales, and importers needed larger loans for incoming goods. Businesses built inventories and financed imports, while households increased spending. Last year, festivals were disrupted by Gen Z protests, which killed 76 people and caused about Rs84.45 billion in property damage.

The return of normal festive activity helped drive Rs133 billion in additional bank credit between July 17 and October 11. Yet trade financing remained a major contributor, and bankers said large corporate-loan demand stayed subdued. Therefore, the increase signals revived seasonal borrowing, not proof of broad industrial recovery.

Sustained lending to industry, infrastructure, and operating businesses can expand production, jobs, and incomes. That creates new economic activity and repayment capacity, unlike borrowing that mainly covers temporarily costlier purchases or asset trades.

For example, a trader may need more credit to import the same goods when prices rise or the US dollar strengthens. A vehicle, real-estate, or share-backed loan can also lift borrowing without adding factory output; productive loans instead finance equipment, construction, materials, and workers, creating lasting capacity.

Nepal’s banks added Rs133 billion in credit by October 11, yet trade financing remained a major driver. Industrial credit demand had not increased significantly in the first two months, while the industrial sector reportedly deteriorated further. The increase also followed an unusually weak base after protests disrupted last year’s activity. Recovery will look stronger if lending shifts toward sustained production and investment, not merely seasonal imports or asset purchases.