NRB Eases Policy After Slow Credit Growth; 12% Annual Target Still an Uphill Task

After private sector credit growth remained disappointingly low in the first six months of the current fiscal year, the Nepal Rastra Bank has introduced “corrective” measures through its mid-term monetary policy review. Despite setting an annual target of 12 percent credit expansion, the central bank achieved only 3.8 percent growth by mid-January, prompting it to ease several policy provisions to stimulate lending in the remaining months. With half the fiscal year already over and only one-third of the target met, the situation clearly reflects ongoing economic sluggishness.

Although banks are flush with liquidity, weak borrowing appetite among businesses has compelled the central bank to introduce flexibility in the Working Capital Loan Guidelines. Banks have now been granted authority to determine the tenure of permanent working capital loans, reducing short-term repayment pressure on industries and encouraging longer-term investment planning. Furthermore, priority lending sectors have been expanded beyond agriculture and energy to include tourism, information technology, and export-oriented industries based on domestic raw materials, creating a stronger foundation for productive credit growth.

The review has also provided relief to borrowers affected by the economic slowdown but deemed genuine in intent. Eligible borrowers may be temporarily removed from the blacklist for up to six months to restructure and settle their loans, allowing small and medium enterprises to re-enter the formal banking system. Meanwhile, policy rates have been reduced to 4.25 percent and the bank rate to 5.75 percent, pushing lending rates to historically low levels. With remittance inflows surpassing Rs 1 trillion and a strong balance of payments surplus, banks currently possess ample lending capacity.

However, achieving the remaining 8.2 percent credit growth within six months remains a significant challenge. Experts argue that policy easing alone will not suffice; demand for goods and services must also revive. If banks swiftly implement the new provisions and entrepreneurs capitalize on lower borrowing costs, credit growth could improve by late spring. Otherwise, despite strong external indicators, failure to expand credit as targeted may hinder broader economic recovery. For now, both the government and the central bank appear to have little alternative but to focus decisively on accelerating credit expansion.