There are two ways to build a house. One can create a structure that looks impressive from the outside but is supported by a weak foundation. Or, one can invest time and effort to build a house with a solid base, even if it does not look beautiful at first glance. The first option is faster, easier and visually appealing, but the slightest tremor, say a 6.6 magnitude earthquake, can bring it crashing down. The second approach might take longer and may not look as attractive initially, but it provides strength, stability and safety.
The fiscal and monetary policies of the government announced recently seem to focus on making beautiful houses by addressing issues in the real estate sector and share market transactions. But, much like the first approach, these policies do not tackle the real challenge: rebuilding the foundation of Nepal’s economy.
The Carpenter’s Story
Five years ago, a hardworking carpenter took a loan of Rs 700,000 from a well-governed financial cooperative to invest in his carpentry workshop. Since then, he has worked diligently, providing high-quality furniture to his clients and repaying his loan, both principal and interest, on time. He never defaulted.
But during the most recent renewal of his loan, the cooperative’s manager gave him unexpected news: “Sir, you need to repay the entire principal and interest immediately. Our cooperative is facing a liquidity crunch—depositors are pulling out funds, and we do not have enough to pay them back.”
The carpenter was shocked. “How can I repay the full amount right now?” he asked. “The money went into equipment and infrastructure; I have been paying every installment on time.”
But the cooperative, itself caught in a financial storm, could offer no flexibility. This was not due to any wrongdoing on the part of the carpenter or the cooperative, but rather a result of poor governance and weak regulatory oversight across Nepal’s financial cooperative sector.
Suddenly, the carpenter’s focus shifted from creating quality furniture to scrambling for money. He tried to sell his workshop, but failed to find a buyer. He considered approaching commercial banks, but lacked the documentation and credit history to qualify for a loan from Class A or B banks. Financial cooperatives had been his only option, but now even that door was closed.
Desperate, he sold his wife’s jewelry, managing to raise Rs 200,000, far short of what he owed. He looked to the informal loan market, locally known as 'meter-byazi', only to find that this high-interest, unregulated system had been outlawed.
The carpenter is a man with a clean record and a good name in society. He never cheated, never defaulted. But now he lies awake at night, anxious that he will be blacklisted which will tarnish his reputation. The carpenter finds himself in dire straits even though he did nothing wrong.
The Small Micro Enterprise Segment
The carpenter’s business in the case study can be termed as ‘small micro enterprise’. There are around 1.5 million such enterprises across the country. Few examples of such enterprises are as under:
We see small enterprises like these all around us. Most of the time, we overlook them. However, these small enterprises are the foundation of our economy. On average, each of these enterprises employs around five people. That means approximately 7.5 million members of our active workforce, who chose not to migrate to the Middle East or Malaysia, are contributing here, at home, through these enterprises.
Do our official data sources, like those from the Nepal Rastra Bank or the National Statistics Office, accurately capture their transactions and cash flows? I am not sure. But what I do know is: these enterprises are the real engine of our economy where genuine transactions and grass-roots level cash flows are happening every day.
Lack of Market Demand
In the case study illustrated above, our carpenter, through years of hard work and discipline, had managed to buy 4 aana of land in the southern foothills of the Kathmandu Valley. Like everyone else, he has a dream of building a home there, a place where he, his wife and two children can finally settle and call their own. For 99% of Nepalis, owning a house inside Kathmandu Valley is a lifelong aspiration. It is not difficult to understand why our carpenter has not been able to build that home. Given the financial crisis he is now entangled in, building a house is not even within the realm of possibility for him.
This situation does not end with the carpenter. The local hardware shop, where he would have bought cement, steel and other building materials, has seen demand dry up. Their inventory sits idle in storage. As a result, the hardware shop owner has no incentive to reorder supplies from wholesalers or dealers. This slowdown trickles up the supply chain, ultimately affecting large manufacturing companies that produce or supply construction materials. Many of their factories are now operating at just 40-50% of their capacity.
The carpenter is just one example. There are an estimated 1.5 million small business owners in Nepal, and many are facing similar financial issues. This cyclical effect is hindering creation of new demand in the market which is fast becoming a major structural problem in our economy.
Let’s now turn our attention to the formal sector.
Banks Grappling with Excess Liquidity, NPA Problem
Driven by fear of losing their deposits—especially in financial cooperatives, microfinance institutions, and informal segments—depositors have moved their money to Class A and B banks. Cooperatives once attracted large numbers of depositors by offering interest rates as high as 16%. These institutions, present in virtually every corner of Nepal, number around 32,000.
As deposits flooded into the formal banking sector, interest rates have significantly declined on both liabilities and assets. Deposit rates have dropped from 9% to as low as 3%, while lending rates have fallen from 13% to around 8%. While depositors now earn less, the reduced cost of funds should ideally encourage borrowers, especially entrepreneurs and business owners, to take loans, initiate new projects, expand existing businesses, and thus drive growth in products, services and employment.
However, a paradoxical situation has emerged.
Though deposits have shifted to Class A and B banks, they have largely remained idle. That is, the deposits are not being mobilized into lending at the level necessary to energize the economy. Even though lending rates have dropped to 8% or lower for prime borrowers, the real sector, especially construction-related manufacturing, real estate, and similar industries, has shown little interest in borrowing.
This reluctance can be explained by a case study of the carpenter discussed above.
In this situation, relationship managers at Class A and B banks have turned their attention to large corporate houses, especially those in the business of manufacturing or trading cement, steel, aluminum, glass, paints, UPVC products, bathroom fixtures, and so on. Banks are offering low-interest funds to these corporate houses hoping to spur borrowing.
A typical conversation goes like this:
Relationship Manager: “Sir, we understand that lending rates used to be as high as 13%. Today, they’ve dropped below 8%. Why not borrow more to expand your operations?”
Corporate Borrower: “True, borrowing is cheaper now. But what’s the point, even if we get loans at 5%? Our warehouses are full of unsold inventory that will last two months. Our factories are operating at only 40–50% capacity. Until there’s a clear surge in local demand, we can’t justify borrowing; there’s simply no need for more working capital.”
Disappointed, the Relationship Manager returns to the bank with the same report. The bank’s treasury continues to accumulate liquidity it cannot deploy. This situation is creating significant net interest margin (NIM) pressure on bank balance sheets.
At the same time, banks are also facing rising non-performing loans (NPLs) from past lending to micro and small enterprises. As a result, the banking sector’s overall NPL ratio has recently crossed 5%. This has made banks more cautious, if not reluctant, to lend to this vulnerable segment.
This has led to a classic Catch-22 for Nepal’s large banks. They do not have a business model to work around in this situation.
Way Out
Achieving sustainable economic growth is impossible without addressing the broader economic landscape, particularly the 1.5 million small businesses that collectively employ an estimated 7.5 million people. Focusing solely on the formal sector and its corporate borrowers, those who deal with Class A and B banks, will not deliver. We must look beyond data, beyond balance sheets and beyond the confines of the formal corporate world.
While the intentions of the government, particularly the finance ministry and the central bank, may be positive, the current approach is too shallow. Cosmetic policy adjustments, such as increasing the housing loan threshold or raising limits for share market transactions, are insufficient to address the underlying structural issues in the economy.
The solution is undeniably complex and challenging. We must focus on solving the real, ground-level problems, those experienced by the likes of the carpenter featured in the case study, and by the 1.5 million small business owners across the country. This article, with its limitations, cannot provide a detailed roadmap. However, should the finance ministry, the central bank or the National Cooperative Board wish to collaborate, KFA, a knowledge organization with 25 years of experience, is ready to support this critically important initiative to lift the country out of its prolonged ‘economic recession’.
This opinion article was originally publihsed in August 2025 issue of New Business Age Magazine.
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