Kathmandu — Banks and financial institutions have significantly reduced lending to low-income and poor borrowers amid growing difficulties in loan recovery, even as overall credit flow in the banking system continues to expand.
According to data from Nepal Rastra Bank, outstanding credit extended to poor borrowers declined by 18.88 percent within a year. Such lending stood at Rs 365 billion in Ashar 2081 but fell sharply to Rs 296.9 billion by Ashar 2082. This contraction has occurred despite total credit in the banking sector increasing by 8.17 percent during the same period.
The decline in credit to the poor has been recorded across all provinces. Madhesh Province has been the most affected, witnessing a drop of nearly 40 percent. Bankers cite multiple reasons for the pullback, including weak loan recovery, rising defaults linked to the loan non-payment movement, and stricter regulatory provisions imposed by Nepal Rastra Bank, particularly caps on microfinance lending.
Financial institutions say these factors have increased risk in the sector, making them reluctant to expand lending to vulnerable groups despite policy emphasis on financial inclusion.
However, there are indications of a possible turnaround. Nepal Rastra Bank has recently revised and increased the ceiling on microfinance loans, a move that banks believe could gradually revive lending to poor and low-income borrowers in the coming months, provided recovery conditions improve.
