Nepal’s Financial System After the Crisis: Liquidity, Credit, and Market Stability
Recent instability in Nepal has disrupted not only the stock market but also the financial system. With NEPSE closures, banking stress, and rising fiscal burdens, liquidity and credit flows are now under pressure. This blog explores how Nepal’s financial sector is adjusting and what investors and businesses should expect next.
Introduction
Finance is the lifeblood of any economy, and in Nepal, the financial system is deeply interconnected with both politics and markets. The latest wave of instability has exposed vulnerabilities in liquidity management, credit growth, and investor trust.
While NEPSE reflects immediate investor sentiment, the broader financial system shows how banks, insurers, and regulators cope with shocks. The big questions now are: Will liquidity tighten further? How resilient are banks? And what does it mean for investors and businesses?
1. Liquidity Stress Returns
Liquidity in Nepal’s banking system has been under constant strain in recent years. Even before the latest crisis, banks faced:
High credit-to-deposit (CD) ratios, hovering close to regulatory limits.
Sluggish deposit growth as remittance inflows slowed.
Seasonal demand for cash during festivals and fiscal year-end settlements.
The unrest added another layer of stress:
Disrupted banking operations in curfew-hit areas.
Increased cash withdrawals from risk-averse depositors.
Reduced lending appetite from banks seeking to preserve liquidity.
For businesses and retail borrowers, this means tighter credit conditions and potential delays in loan approvals.
2. Credit Growth Under Pressure
Credit expansion has slowed as banks adopt a cautious stance.
Business Loans: Firms in tourism, trade, and services face loan rollovers at higher scrutiny.
Margin Lending: Already under pressure from NEPSE volatility, margin loans are being closely monitored to prevent defaults.
Retail Credit: Personal loans for housing, vehicles, and SMEs may face stricter risk checks.
If credit remains subdued, private sector investment could stall — reducing GDP growth momentum.
3. Banking Sector Risks
Non-Performing Loans (NPLs)
Banks face the risk of rising defaults as businesses disrupted by instability struggle to meet obligations. If NPLs rise, profitability will weaken.
Profitability and Spreads
High funding costs, combined with weak lending demand, may narrow net interest margins. Some banks may report lower quarterly profits.
Investor Impact
Listed banks in NEPSE may see short-term price corrections as investors anticipate weaker results.
4. Insurance and Capital Market Linkages
Insurance companies are directly exposed through:
Property damage claims related to unrest.
Reduced premium income if businesses scale back coverage.
On the investment side, insurers are among the largest institutional investors in NEPSE. A pullback in their equity exposure can dampen market liquidity.
5. NRB’s Role: Policy in Focus
Nepal Rastra Bank (NRB) will play a critical stabilizing role:
Liquidity Management: Injecting liquidity through repo and standing liquidity facilities if deposit stress worsens.
Credit Monitoring: Ensuring banks maintain discipline in margin lending and high-risk sectors.
Interest Rates: Maintaining a balance between supporting growth and keeping inflation in check.
Investors should watch NRB’s next monetary updates closely, as even small changes in policy direction will ripple across NEPSE.
6. NEPSE’s Financial Fragility
From a financial system perspective, NEPSE reveals:
Thin Liquidity Pools: Even moderate selling creates sharp index swings.
Margin Loan Overhang: Excessive leverage by retail investors amplifies volatility.
Confidence Premium: Investors demand higher returns for bearing political and financial risk.
Unless market depth improves, NEPSE will remain vulnerable to systemic shocks.
7. Fiscal Strain and Financing Needs
The government faces new fiscal pressures:
Rebuilding costs for damaged public assets.
Compensation schemes for affected businesses and households.
Revenue shortfall from disrupted trade and taxes.
To finance these, the government may:
Issue more treasury bills and bonds, absorbing banking liquidity.
Rely on foreign loans or grants, which may come with conditions.
Reallocate budget from development spending, delaying infrastructure projects.
Each path influences Nepal’s financial stability — either by squeezing liquidity, raising debt, or reducing growth investment.
8. Lessons for Investors and Businesses
✅ Monitor Bank Health
Investors should track CD ratios, NPLs, and profitability of listed banks. Businesses should diversify banking relationships to reduce credit access risk.
✅ Reassess Leverage
Margin trading remains risky in volatile conditions. Retail investors should limit exposure.
✅ Stay Aligned with Policy
Watch NRB’s liquidity measures and interest rate stance. Policy direction will shape credit availability and market trends.
✅ Focus on Fundamentals
Investors in NEPSE should emphasize companies with strong cash reserves, low debt, and consistent dividend history.
Conclusion
The financial aftermath of Nepal’s latest instability is still unfolding. Banks are under liquidity pressure, credit growth is slowing, insurers face claims, and NEPSE remains volatile. The fiscal burden of reconstruction will only add to the strain.
Yet, Nepal’s financial system has weathered crises before. With prudent regulation, policy support, and investor discipline, stability can return. The lesson for all stakeholders is clear: finance is not insulated from instability — it is the first and most sensitive channel through which uncertainty flows.
For now, caution, diversification, and close monitoring of policy will be key to navigating Nepal’s financial landscape.