Banks Hesitant to Extend Loans Amid Rising Defaults and Regulatory Pressure

May 27, Kathmandu – Banks have recently shown reluctance to extend loans, primarily due to increasing non-performing loans, incidents of loan misuse, and heightened police raids on bank staff. This environment has made banks more cautious when lending. Consequently, the screening process for loan applicants has become more complex and stringent, leading to staff discouragement. Bank employees report that loan disbursements have not met demand because of these challenges. Issues in loan recovery and government policies have also hindered banks from promptly approving new loan requests.

A CEO of a commercial bank remarked that in the past, loans were extended without thorough risk assessment, resulting in increased loan misuse, defaults, and recovery challenges, prompting banks to adopt a more guarded approach to lending. He further noted that the morale among banks and business operators has declined since the government introduced stricter regulations aimed at greater oversight and control. Following the COVID-19 pandemic, the central bank relaxed lending policies to stimulate the economy.

Banks and financial institutions even adopted aggressive strategies, such as visiting clients at their homes to distribute loans. While these efforts invigorated economic activity, they did not translate into increased production. An official explained that this shift led to an abnormal rise in transactions in unproductive sectors. To address irregularities in sectors generating “easy money,” such as shares and real estate, the central bank tightened lending policies.

As the economy slowed, borrowers began defaulting on loan installments, causing a rise in non-performing loans. The CEO stated that banks and financial institutions, facing recovery difficulties on investments made without proper risk assessment, now must selectively approve new loans only to applicants with lower risk profiles.

“Previously, bank employees tended to approve loans motivated more by commissions from borrowers than by the risk involved,” said the CEO. “With the new emphasis on risk analysis and stricter measures against loan misuse, banks have shifted to a more selective loan approval process, offering credit only to carefully vetted customers.”