Lower Interest Rates Drive Growth in Home Loans

Personal home loans have surged despite an overall slowdown in bank lending, driven by lower interest rates and policy incentives introduced by Nepal Rastra Bank (NRB).

According to NRB data, banks and financial institutions had extended Rs 27.34 billion in personal home loans of up to Rs 20 million by mid-December of the current fiscal year 2025/26, compared to Rs 11.13 billion during the same period last fiscal year.

While total private-sector credit grew by just 1.9 percent, or Rs 102.24 billion, in the first five months of the current fiscal year (mid-July to mid-December), personal home loans expanded by 6.5 percent. The growth rate during the same period last year stood at 2.9 percent. By mid-December, outstanding personal home loans had reached Rs 444 billion.

NRB had introduced measures to encourage home loans in its monetary policy for the current fiscal year to stimulate credit growth. As part of the policy, the central bank raised the ceiling on personal home loans from Rs 20 million to Rs 30 million.

In another first, NRB increased the loan-to-value (LTV) ratio to 80 percent for loans of up to Rs 30 million for home purchase or construction. Bankers say the policy easing, coupled with lower credit risk, has supported strong growth in personal home loans.

“With limited demand for large corporate loans, banks are focusing on smaller home loans,” said Devendra Raman Khanal, Chief Executive Officer of Rastriya Banijya Bank. “Since these loans are extended to individuals with regular income and repaid in installments, the risk is relatively low.” He added that NRB’s policy incentives have also played a key role.

Lower base rates and lending rates have further encouraged even lower-income borrowers to opt for long-term home loans. Banks have also rolled out customized loan products to attract such customers.

As of mid-December, the average base rate of commercial banks had declined to 5.38 percent, while the average lending rate fell to 8.90 percent. Banks typically add a premium of 1 to 5 percentage points over the base rate. Based on this, commercial banks are currently offering home loans at around 5 percent under floating-rate schemes and about 10 percent under fixed-rate schemes.

NRB data show that by mid-December, hire-purchase loans increased by 6.1 percent, margin loans by 5.7 percent, and real estate loans (including personal housing loans) by 3.7 percent. Cash credit loans rose by 2.6 percent, term loans by 1.2 percent, and demand and other working capital loans by 1 percent, while trust receipt (import) loans increased by 0.9 percent. Overdraft loans, however, declined by 5.4 percent.