Nepal’s Credit Cycle: The Hidden Equity Cycle

First published 21 Aug 2026 · Last verified 7 Sep 2026

Part 0: Why This Part Exists Before Part I

Every other investing textbook begins with the market. This one begins with what drives the market — because in Nepal, the relationship between underlying economic forces and equity prices is unusually direct, unusually mechanical, and unusually exploitable once understood.

Most markets have enough depth, participant diversity, and instrument variety that prices reflect many competing signals simultaneously. Fundamental analysis, momentum, flows, sentiment, and macro all interact. No single force dominates.

NEPSE is not that market.

NEPSE is a market in which one institution — Nepal Rastra Bank — and one variable — the availability of credit — explain the majority of index movement over any meaningful time horizon. The 2016–17 bull run was a credit expansion cycle. The 2021 boom was a liquidity flood catalysed by COVID-era monetary easing. The 2022 crash was a policy tightening episode. And the 2024–26 re-rating — from the low 2,000s to a touch under 3,000 — was a deposit-and-rate cycle: the fastest remittance inflows in Nepal’s history and a policy rate cut from 6.5 to 4.25 percent, arriving while bank lending growth stayed unusually weak. In each case, the direction and magnitude of market movement was more accurately predicted by NRB’s credit and monetary instruments than by the earnings reports of individual companies.

This is not an accident of history. It is a structural feature of Nepal’s financial architecture:

• The banking and financial complex — 20 commercial banks, 17 development banks, 17 finance companies, plus microfinance and insurance — has historically constituted roughly half to two-thirds of NEPSE market capitalisation. When bank earnings move, the index moves. Bank earnings are almost entirely a function of credit growth, net interest margin, and non-performing loans — all directly controlled or heavily influenced by NRB policy.

• There are no short sellers, no derivatives, no ETF arbitrageurs. Price discovery is dominated by retail investors responding to credit availability — when loans are cheap and easy, they invest; when credit tightens, they withdraw.

• Nepal’s real economy is heavily import-dependent and remittance-financed. The monetary transmission mechanism is short: NRB instrument → bank behaviour → economic activity → corporate earnings → market prices.

• Margin lending — the direct use of bank credit to buy equities — amplifies both the upswing and the correction in ways that are unique in scale to Nepal’s market structure.

Part 0 does not replace Parts I through XVIII. It provides the gravitational framework within which all other analysis operates. A reader who understands Nepal’s credit cycle, NRB’s transmission mechanisms, and the four liquidity regimes will interpret every ratio, every financial statement, and every valuation in this Canon with a level of contextual depth that a reader who skips this Part will never fully achieve.

Chapter 0.1 — Nepal’s Credit Cycle: The Hidden Equity Cycle

The credit cycle is the master cycle in Nepal’s economy. Every other cycle — the earnings cycle, the valuation cycle, the liquidity cycle — is a derivative of it. An investor who can read Nepal’s credit cycle accurately is, in effect, reading the equity market six to eighteen months in advance.

This chapter builds the empirical and conceptual foundation. It establishes the correlation, explains the mechanism, quantifies the lag, and shows the investor exactly where to find the data — and then, because the Canon is written to be used rather than admired, it closes by reading the data as they stand in September 2026.

0.1.1 — Bank Lending Growth vs. NEPSE Index: The Empirical Correlation and Why It Holds

The single most important chart any Nepali investor can study is the overlay of NRB’s private-sector credit growth data against the NEPSE composite index. The correlation is not merely suggestive — it is structurally explanatory.

The Observed Pattern

Over every major market cycle since NEPSE’s formalisation, the following pattern holds with remarkable consistency:

Table 0.1.1 — Credit Growth and NEPSE Index Relationship (Illustrative Pattern Based on Historical Cycles)

Why the Correlation Holds: The Structural Explanation

The credit-equity correlation in Nepal is not the loose, noise-filled relationship seen in more diversified markets. It holds because of a chain of structural dependencies:

1. Banking sector dominance: Commercial banks and financial institutions comprise the majority of NEPSE’s market capitalisation and trading volume. When credit growth accelerates, bank earnings grow directly through net interest margin expansion and fee income growth. When credit contracts, bank earnings compress. Because banks are NEPSE, the index is effectively a leveraged tracker of credit growth.

2. The margin lending amplification: NRB permits lending against listed securities. When credit is expanding, margin loan limits are generous and interest rates are low. This creates a self-reinforcing loop: cheap credit → investors borrow to buy shares → share prices rise → collateral values increase → more borrowing capacity → more buying. The reverse is equally mechanical.

3. Retail investor behaviour: The majority of NEPSE’s trading volume comes from retail investors whose financial health tracks the broader credit environment. When banks are lending freely, salary-account holders become margin borrowers become equity buyers. When banks stop lending, the same people become sellers.

The Stress Test: What 2024–26 Added to the Evidence

The most recent cycle sharpened the correlation in an unexpected way, and it is worth studying carefully because it refines rather than contradicts the rule. Between early 2024 and March 2026, the NEPSE index roughly climbed from the low 2,000s to about 2,950 — a re-rating of nearly half the index — while annual private-sector credit growth was just 6.6 percent, less than half the “peak expansion” rate the classic pattern would lead you to expect. Was the correlation broken?

No. It was outpaced. Deposits grew 13.4 percent over the same fiscal year, powered by remittance inflows of roughly Rs 2,363 billion — a record. With lending demand weak and the banking system’s credit-to-deposit ratio sitting near 74 percent, an ocean of fresh deposits had nowhere to go: deposit rates collapsed, fixed deposits written at 10–11 percent in 2022/23 matured into renewals near 5 percent, and that wall of money went looking for yield. The only large, liquid, national clearing house for yield-hungry money in Nepal is the share market. The index rose on liquidity, not on credit.

Which is why the second half of the pattern matters: by September 2026 the index had eased back to the mid-2,500s. A liquidity-led rally can lift prices, but only credit growth can lift earnings enough to hold them up. The market had run ahead of the credit cycle and was digesting the gap. The refined rule is this: the index leads on liquidity; it sustains on credit. Watch both legs, and treat any gap between them as stored energy — in either direction.

0.1.2 — Remittance → Deposit → Lending Multiplier: How External Inflows Become Domestic Credit

Nepal’s credit does not begin in Nepal. It begins in Kuala Lumpur, Doha, Dubai, Riyadh and Seoul — in the wages of several million Nepali workers — and arrives home every month as remittances that become bank deposits, which become lending capacity. Understanding this pipeline is understanding where credit cycles come from.

The Multiplier, Step by Step

The mechanics are simple enough to follow over tea. A worker in Malaysia sends home Rs 25,000. The receiving family banks Rs 15,000 and spends Rs 10,000 in the local sabzi mandi; the shopkeeper deposits her takings too. The commercial bank now holds new deposits against which it may lend up to the credit-to-deposit (CD) ceiling NRB allows — 90 percent since the 2023 tightening. Each Rs 100 of new deposits can therefore support up to Rs 90 of new loans, and those loans — paid to contractors, traders, suppliers — come back as fresh deposits that support further lending. This is the deposit-to-credit multiplier, and its fuel is external.

The 2025/26 Surge: The Multiplier at Record Speed

In the eight months to mid-March 2026, workers’ remittances rose 37.7 percent in rupee terms (31.0 percent in US dollars) to Rs 1,449.65 billion; the full fiscal year closed at roughly Rs 2,363 billion. Malaysia’s labour market reopening, Gulf wage increases, and the steady formalisation of channels through official banking all contributed. The balance of payments ran a surplus of about Rs 658 billion over those eight months, and foreign exchange reserves reached cover equal to more than 18 months of imports — nearly triple NRB’s seven-month adequacy threshold.

Then came the genuinely historic part. For most of Nepal’s modern economic history, the policy problem was too few dollars. In Poush 2082 (December 2025–January 2026), NRB issued Rs 200 billion of one-year NRB bonds to absorb surplus liquidity from the banking system, and bought US dollars to keep the rupee from appreciating too fast. The central bank was no longer pumping liquidity in; it was mopping it up. Every reader of this Canon should pause on that sentence, because it inverts the assumption baked into most Nepali market commentary of the last two decades.

0.1.3 — Credit Expansion Lag to EPS Growth: Why Bank Earnings Follow the Credit Cycle by 6–12 Months

Credit growth drives bank earnings — but with a lag that is long enough to be tradeable and stable enough to be planned around. Understanding why the lag exists is more valuable than memorising its length.

The Lag Mechanism

A loan written today generates interest income for years. So when credit growth accelerates from 10 to 20 percent, the banking system’s earning asset base is compounding on both the old book and the new flow, and net interest income accelerates for six to twelve quarters. Fee income — commissions, guarantees, trade finance — follows lending activity almost immediately, but it is the smaller component. The reverse works identically: when credit growth stalls, the asset base keeps paying interest on existing loans, so earnings decay slowly at first, then faster as funding costs catch up and problem loans emerge.

What the 2025 Earnings Recovery Actually Proved

The 2024–26 period offered a clean demonstration of a subtler point: bank earnings can inflect upward before credit growth does. Through 2025 and into 2026, credit growth stayed weak (6.6 percent for the fiscal year) — yet bank profitability began recovering. Three forces did the work:

• Funding cost collapse: the weighted average interbank rate spent 2025/26 near 2.7 percent, and maturing high-rate fixed deposits repriced down by five to six percentage points. A bank’s largest expense fell without a single new loan being written.

• Provisioning relief: system-wide non-performing loans, which had climbed to roughly 5.4 percent during the 2022–24 repair phase, stopped rising as accommodation-oriented policy took hold. When the NPL ratio crests, the provisioning line that has been crushing profit stops deepening — and bank EPS rebounds off a depressed base.

• Policy-coded revival: the FY 2083/84 monetary policy explicitly committed to managing NPLs in distressed industries and facilitating loan revival for stressed borrowers — regulator-assisted provisioning relief.

The investor’s takeaway, six to twelve months ahead of the crowd: bank earnings cycles bottom at the provisioning peak, not at the credit growth trough. In 2025, earnings recovered while credit grew at barely half its historical average — precisely because the two cycles are related but not identical. Track them separately.

0.1.4 — Credit Contraction and NPL Spike: The Inevitable Phase-Shift and Its Equity Consequences

Every expansion ends. In Nepal the end typically arrives not as a gradual fade but as a phase shift: a period of tightening policy converts comfortable borrowers into stressed ones with a lag of three to five quarters, and the accounting system — which recognises bad loans slowly — then stretches the pain across years. This section explains the shift; Chapter 0.3 turns it into a positioning framework.

The Phase-Shift Mechanism

During expansions, Nepali borrowers rarely repay term loans — they renew them. A renewal culture means the true quality of the loan book is only revealed when refinancing dries up. When NRB tightens — a lower CD ceiling, costlier liquidity, tighter margin rules — banks stop renewing, and the borrower who was never actually servicing his loan from cash flow must finally repay from somewhere. Somewhere is usually another bank, then another, and the stress surfaces as an NPL months later.

The 2022–24 episode was the textbook case. Tightening that began in 2021/22 — CD ratio pushed toward the 90 percent ceiling, interbank rates spiking, margin lending squeezed — produced, with the usual lag, a system-wide NPL ratio that climbed from the neighbourhood of 1.5 percent in early 2022 to roughly 5.4 percent at the cycle peak. Provisioning bit into earnings for two straight years. P/B multiples across the banking sector compressed to multi-year lows. Microfinance, whose borrowers sit furthest from formal income buffers, suffered most severely.

The Recognition Lag You Can Trade

Here is the detail worth real money. Nepali loan accounting recognises distress late — renewal and restructuring postpone classification. The reported NPL ratio therefore peaks well after true stress peaks, and the market, which trades on reported numbers, typically capitulates around the accounting peak — that is, after the actual credit turn. The investor who tracks the leading cousins of the NPL ratio — renewal and restructuring requests, fixed-deposit maturity walls (a borrower refinancing at 11 percent into a 5 percent world is healthier than his accounting suggests), sector-specific distress indicators, and the policy language around loan revival — can position for the earnings inflection while the reported NPL ratio is still ugly. In 2024–25, that is precisely the window in which the re-rating began.

0.1.5 — Reading the NRB Credit Growth Data: Where to Find It and What Signal to Extract

None of this framework is usable unless you can read the data yourself, at the source, for free. This lesson maps the plumbing.

The Documents That Matter

• NRB’s Current Macroeconomic and Financial Situation — published monthly (about six weeks after month-end), with a full-year edition each August. This is the single most important recurring document in Nepali investing: remittances, deposit growth, private-sector credit growth, interbank rates, reserves, all in one place.

• The Monetary Policy Statement — unveiled each July for the coming fiscal year, with a first quarterly review around Mangsir (Nov–Dec), a mid-term review around Falgun (Feb–Mar), and a third review before the year ends. Every CD-ratio, margin-lending, and corridor change in this Canon was announced in one of these.

• NRB’s BFI statistics and quarterly financials of listed banks — for NPL ratios, provisioning, and NIM at the level of individual institutions.

A Live Reading: September 2026

To make the method concrete, here is the framework applied to the data as they stand when this chapter was last verified:

Table 0.1.2 — The Credit-Cycle Dashboard, September 2026

The reading: liquidity is unambiguously loose, credit is still sluggish, asset quality is past the worst but not clean, and the market has recently given back part of a large liquidity-led gain. That combination — not a formal label, but a posture — says recovery phase with repair-phase scars: the cycle argues for patience and for watching one number above all. If credit growth re-accelerates through 8–10 percent while deposits stay strong, the market’s earnings base broadens and the recovery extends. If credit stays near 6 percent while deposit growth slows, the liquidity surplus that powered the rally begins to drain — and the stored energy works in reverse.

Chapter recap

Nepal’s equity market is downstream of its credit system, and its credit system is downstream of remittances and NRB policy. The credit cycle is the master cycle: it leads bank earnings by six to twelve months, it drives the index through banking dominance and margin amplification, and its turning points — visible in NRB’s free monthly data — mark the great opportunities and dangers of Nepali investing. The 2024–26 episode added a refinement: liquidity can lead the market far, but only credit growth sustains it, and the gap between the two is stored energy. The investor’s job is not to predict the cycle precisely; it is to know, at all times, which phase the data describe — and to let that knowledge govern posture rather than prediction.