'Confidence and Governance Key to Reviving Nepal’s Credit Growth'

Nepal’s banking sector is entering a delicate phase. Liquidity is ample and interest rates have eased, yet credit growth remains weak, pointing to soft demand and a cautious private sector. Against this backdrop, New Business Age’s Ashim Neupane spoke with Prasidha Raj Aryal, Deputy Chief Executive Officer of Machhapuchchhre Bank, on how the bank is navigating the shift. From managing capital pressures and asset quality stress to rebuilding its portfolio through disciplined recovery and calibrated growth, Aryal outlines a strategy shaped by caution and reset. He argues that the current slowdown is cyclical rather than structural and stresses the need for stronger governance and policy consistency to unlock the next phase of growth. Excerpts:

Q: Machhapuchchhre Bank reported a net profit of Rs 1.01 billion in the first half of FY 2025/26, up from Rs 0.81 billion a year earlier. What drove this growth, and how does the bank view the outlook for the second half of the fiscal year?

To understand the improvement, it is important to look at the recent past. Until about two years ago, Machhapuchchhre Bank saw little growth due to capital constraints. This limited the expansion of its loan portfolio, and without credit growth, profitability remained under pressure. The situation began to change last year as the bank reached a more comfortable capital position. This allowed it to restructure its operations and focus on building a stronger business foundation. As a result, growth has picked up, with performance this year exceeding the industry average.

A key driver has been the expansion of trade-related services, including letters of credit, TT, TAP, other non-funded facilities, and bank guarantees. At the same time, the bank has strengthened its position in digital banking by setting up a dedicated team, with visible results. It has also made notable progress in inward remittances, a segment where its presence was previously limited. These efforts are now translating into improved financial performance, reflecting the work done over the past two years. The bank is also following a clearly defined five-year plan, focusing on its own strategy rather than benchmarking itself against larger peers. While it operates with a relatively smaller capital base, management remains confident that it can deliver growth aligned with its capacity. Looking ahead, the bank expects a stable and steady trajectory in the second half of FY 2025/26. It is not pursuing aggressive loan expansion, mindful of the risks associated with rapid credit growth, which the industry continues to manage through monitoring and recovery. Instead, the focus is on measured and sustainable growth, supported by prudent planning and disciplined execution.

Q: Despite system-wide stress, your NPL ratio declined slightly to 4.25%. What worked in terms of asset quality management?

About three years ago, the banking sector entered a difficult phase. Asset quality came under pressure, recoveries slowed, non-performing loans rose, and even interest servicing became irregular. This followed a period of rapid credit expansion, which added to the strain. At both management and board levels, we took a hard look at the situation. We accepted that past excesses could not be reversed and shifted our focus to corrective action. This involved developing clear strategies for both business growth and recovery. One key realization was that our systems were heavily geared toward lending, with insufficient emphasis on recovery, monitoring, follow-up, and collections. We addressed this gap by restructuring the organization, aligning roles more effectively, and placing the right people in the right positions through a comprehensive human resource review. We then moved decisively to strengthen recovery. With coordinated efforts across branches, provincial offices, and the central team, we began to regain control of the portfolio. This process allowed us to identify problem areas in detail and act on them.

At a time when many banks were occupied with mergers, limiting their ability to closely assess their portfolios, we had the advantage of focus and flexibility. We conducted a granular review, identified specific weaknesses, and implemented targeted recovery plans with strict discipline. Over time, we worked to clean up the portfolio. In a downturn, losses are unavoidable and must be recognized. In many cases, borrowers were no longer in a position to repay, and collateral values had declined. Where recovery was not viable, we chose to take the necessary write-downs and move forward rather than delay the process. There is no single factor behind the improvement. It reflects disciplined execution, coordinated teamwork, and adherence to a clear recovery strategy. Even so, we are not yet fully comfortable, and further work remains.

Q: Banks are sitting on excess liquidity, yet credit growth is still weak. How do you explain this disconnect? Is the issue primarily lack of demand, or are banks themselves becoming more cautious in lending?

For a long time, there was an assumption that all sectors would continue to grow. Few anticipated the scale of losses if the cycle turned, or the possibility of a downturn of this magnitude. During the Covid-19 period, private sector confidence was strong. Liquidity was ample, borrowing was easy, and banks were willing to lend across sectors. Credit flowed widely, often beyond core areas of expertise. For example, investors from hydropower moved into tourism, and similar cross-sector expansion became common. Banks supported this trend. In the post-Covid period, however, underlying weaknesses began to surface. At a time when the market was still expanding, the introduction of working capital guidelines marked a turning point. In retrospect, the intervention by Nepal Rastra Bank was necessary.

Without it, the correction could have been far more severe. While the tighter regulations were initially difficult, they have helped restore discipline in the system. Political instability has also played a major role in weakening private sector confidence. A significant share of business failures can be linked to policy inconsistency, which has made long-term planning difficult. In sectors such as real estate, changes in policies, including land ceiling limits, disrupted business models that were built on projected cash flows.

At the same time, many sectors are now dealing with excess capacity. Industries such as cement, tourism, and hydropower expanded aggressively, only to face a slowdown in demand as the economy weakened. This mismatch has further dampened borrowing appetite. As a result, the issue today is largely on the demand side. Weak confidence, policy uncertainty, and the aftereffects of overexpansion have reduced the need for new credit. Banks, for their part, are also more cautious, but the primary constraint is the lack of viable demand. Going forward, a stronger and more consistent policy push from the government will be critical to revive investment and restore confidence.

Q: With credit not picking up, banks are increasingly parking funds in government securities and other non-lending assets. How sustainable is this strategy?

At present, there are limited alternatives. Banks cannot afford to repeat past mistakes by lending aggressively without adequate risk assessment simply to expand their loan books. In the absence of viable credit demand, the key question is where to deploy surplus funds. Deposits continue to grow steadily, but they come at a cost. If not deployed effectively, they can become a liability. For instance, deposit growth this year has been around Rs 26 billion, compared to loan growth of about Rs 17 billion. Banks are required to service these deposits, with savings rates at around 2.75%.

Given weak credit demand, banks have little choice but to invest in government securities and other low-risk instruments. This helps preserve capital and maintain liquidity, even if returns are modest. The strategy, however, is not a long-term solution. Once demand for credit recovers, lending will pick up and funds will be redeployed into higher-yielding assets. Until then, parking liquidity in government securities remains a practical and prudent approach. In my view, it could take another one to two years for the system to fully absorb excess liquidity, even with improved political and policy conditions.

Q: Interest rates have declined, but has this translated into a meaningful improvement in lending activity? What policy interventions are needed to revive credit demand? Has monetary easing by Nepal Rastra Bank been sufficient, or is more needed?

Lower interest rates have not yet translated into a meaningful pickup in lending. The core issue lies beyond the cost of borrowing. In Nepal’s context, monetary policy alone cannot resolve the current slowdown. Nepal Rastra Bank has already taken a range of measures through its policy reviews, including easing lending conditions and supporting segments such as the capital market. Expectations from monetary policy have been high, and the central bank has responded to a considerable extent.

At this stage, the emphasis needs to shift toward fiscal policy and broader structural issues. The key constraints now lie in laws, policy clarity, and, more importantly, implementation. Policies may exist on paper, but outcomes depend on consistency, coordination, and the government’s ability to execute. For instance, when even minor approvals for infrastructure projects take months, it highlights the scale of execution bottlenecks. Such delays discourage investment and slow project implementation.

What the private sector needs most at this point is confidence. The economy has the potential to recover, but this requires clear and consistent signals from the government. While Nepal Rastra Bank has largely addressed genuine concerns within its mandate, a stronger and more coordinated policy push from the government will be essential to revive credit demand and support broader economic activity.

Q: How is the bank approaching green investment?

We are actively expanding our engagement in the green sector. The bank has developed its own internal guidelines, and we are conscious of our responsibility in this area. Green investment is inherently long term. It delivers broader social value, and we see it as part of our institutional obligation. Our approach spans products, services, and internal processes, covering both financial and non-financial aspects. We have introduced deposit products linked to green initiatives, and on the lending side, we are financing sectors such as solar energy, electric vehicles, and green housing. This focus is particularly important in Nepal’s context, given the growing impact of climate change and the increasing frequency of natural disasters. At present, green lending accounts for around 10% of our overall portfolio, and we expect this share to grow further.

Q: Do you think the problem now lies more with confidence and the investment climate than the cost of borrowing? Will a new government with a near two-thirds majority help ease the situation? What will be the key trigger for reviving credit growth in Nepal?

Personally, I am optimistic. I believe a new phase for Nepal is beginning. I do not have any political affiliation, but I do believe that this change can contribute positively to the country’s economy. There are high expectations from this government.

The focus should be on improving service delivery, ensuring ease of doing business, streamlining approvals, and making decision-making faster. The government needs to be as efficient as the private sector. If governance improves, I expect strong growth across all sectors. Another key requirement is policy consistency. If the government can ensure stable and predictable policies, it will significantly boost confidence. At this point, the issue is more about confidence and the overall investment climate than just the cost of borrowing. The key trigger for reviving credit growth will be improved governance, faster execution, and a clear, consistent policy environment that encourages the private sector to invest.  

This interview was originally published in April 2026 issue of New Business Age magazine.