Financial Sector Shows Signs of Stability with Improved Credit Flow

Nepal’s domestic credit growth, which had been witnessing a consistent decline over the past few years, showed a modest rebound in the mid-April review of fiscal year 2024/25. According to the latest data from the financial sector, domestic credit expanded by 6.8% year-on-year by mid-April 2024/25, slightly higher than the 5.6% growth observed during the same period in the previous fiscal year.

The trajectory of domestic credit growth in recent years reflects both the macroeconomic conditions and policy responses to internal and external shocks. After a steady 14.0% growth in FY 2019/20, the country experienced a credit boom in FY 2020/21, with domestic credit growing by a staggering 27.1%. This sharp rise was largely driven by relaxed monetary policies and increased liquidity aimed at stimulating economic recovery from the initial impact of the COVID-19 pandemic.

However, the surge proved unsustainable, and credit growth sharply decelerated to 14.5% in FY 2021/22. The downward trend continued in subsequent years, falling to 8.9% in FY 2022/23 and further down to 6.1% in FY 2023/24. Tightened monetary policy, lower demand for private sector credit, and cautious lending by banks contributed to this slowdown.

The slight recovery observed in mid-April of FY 2024/25 suggests a possible bottoming out of the credit contraction cycle. An increase from 5.6% to 6.8% may not seem dramatic, but it could signal the beginning of a credit revival if supported by continued economic momentum, easing interest rates, and improved investor confidence. Still, compared to the historic highs of the pandemic recovery phase, the growth rate remains moderate, and further monitoring is essential to determine whether this uptick marks a sustainable trend.

In essence, while the financial sector continues to grapple with restrained credit expansion, the recent data offers a glimmer of hope that domestic credit activity may be stabilizing, potentially laying the groundwork for renewed economic dynamism in the months ahead.