Credit Policy and Its Direct Impact on NEPSE

First published 22 Aug 2026 · Last verified 29 Aug 2026

Credit does not merely finance NEPSE; in Nepal it has been the single most reliable predictor of where the index goes next. Every major inflection point in the Nepal Stock Exchange since the mid-1990s traces back to a shift in bank lending behaviour that occurred six to eighteen months earlier. When Nepal Rastra Bank floods the banking system with liquidity and private-sector credit accelerates, share prices rise long before corporate earnings justify the move, because a portion of that credit is repurposed, directly through margin loans and indirectly through the wealth and confidence effects of easy money, into equity demand. When NRB tightens, whether by raising the policy rate, capping sector-wise exposure, or simply allowing the credit-to-deposit ratio to bind against the regulatory ceiling, the reverse happens with equal force. An investor who understands this transmission mechanism holds an analytical edge that most NEPSE participants, fixated on candlestick patterns and quarterly EPS, never acquire. This chapter builds that edge systematically: it traces Nepal's credit-to-GDP history and its three identifiable boom-bust cycles, it dissects the mechanics of margin lending as practiced by Nepali banks and finance companies, it catalogues NRB's sector-wise credit caps and their recent liberalization, and it shows, with the actual numbers from 2020 through 2026, how a disciplined investor reads monthly credit data as a leading indicator rather than a lagging curiosity.

Lesson 2.1 — The Credit-GDP Relationship: Why Bank Lending Moves NEPSE

Nepal's financial system is bank-dominated to a degree that has few parallels in South Asia. Commercial banks, development banks, and finance companies together intermediate the overwhelming majority of formal credit in the economy, and NEPSE itself is disproportionately weighted toward these same institutions: banking and financial shares routinely account for more than half of total market capitalisation and a comparable share of daily turnover. This structural fact has a direct consequence that every serious NEPSE analyst must internalize. Because the listed universe is dominated by the very institutions that create credit, and because credit creation is the primary channel through which monetary policy affects the real economy, the health of the banking sector's balance sheet and the pace at which it is expanding its loan book function as a proxy for the health of the entire index. A bank-heavy market cannot decouple from a credit cycle; it is, in a meaningful sense, the credit cycle, traded on a screen.

The mechanism runs through several channels simultaneously. First, there is a direct channel: margin lending, discussed at length in Lesson 2.3, allows credit created by banks to flow straight into share purchases, mechanically bidding up prices as loan disbursement accelerates. Second, there is a wealth-effect channel: when credit is cheap and abundant, real estate values rise (banks in Nepal have historically directed a large share of incremental lending toward property, construction, and housing), and investors holding appreciated land or housing collateral feel richer and reallocate savings into equities. Third, there is a corporate-earnings channel: bank profitability itself is a direct function of loan book growth and net interest margins, so when credit expands, the bottom lines of the twenty-plus listed commercial banks improve mechanically, and because these banks are the largest weights on the index, aggregate NEPSE earnings improve with them regardless of what is happening in the productive economy. Fourth, there is a liquidity channel: excess deposits sitting idle in the banking system, unable to find creditworthy borrowers, migrate into secondary market securities activity, either through banks' own investment portfolios or through their retail customers, compressing the effective cost of holding equities.

Nepal's own economic history offers an unusually clean natural experiment in this relationship, because the country has experienced credit-to-GDP swings of extraordinary amplitude within a short economic history. Nepal Rastra Bank research covering the period from 1990 to 2025 places the long-run average ratio of domestic credit to GDP at roughly 45 percent, with a recorded low near 11 percent in the early liberalization years and a recorded high just above 95 percent in 2022. The World Bank's most recent published figure, for calendar year 2024, puts domestic credit to the private sector at 92.11 percent of GDP, among the higher ratios in South Asia and strikingly high for a country at Nepal's income level. A credit-to-GDP ratio in the neighbourhood of 90 to 95 percent is not, by itself, alarming for a mature financial system, but for an economy with Nepal's shallow capital markets, narrow export base, and heavy reliance on remittance-financed consumption, it signals a financial system that has grown faster than the real economy's capacity to productively absorb that credit. That gap between financial depth and real absorptive capacity is precisely the space in which speculative asset bubbles, including equity bubbles, tend to form.

For the practicing investor the implication is straightforward but frequently ignored: valuation work on individual NEPSE counters, however rigorous, sits on top of a macro-liquidity foundation that can overwhelm firm-specific fundamentals in both directions. A well-run development bank with strong asset quality will still see its share price re-rate downward in a credit contraction, because the entire sector's cost of funds rises and loan growth stalls for every institution simultaneously. Conversely, a mediocre finance company can see its share price triple during a credit boom simply because system-wide liquidity is abundant and speculative capital is searching for high-beta vehicles. Nepal's investors who ignore the credit cycle and focus exclusively on bottom-up stock-picking are, in effect, trying to read individual waves while ignoring the tide.

Lesson 2.2 — The Three Credit Cycles: Lessons from 1994, 2009, and 2021

Nepali monetary history since financial liberalization in the early 1990s divides cleanly into three credit boom-and-bust episodes, and each one left a visible fingerprint on NEPSE. Understanding these three episodes in sequence gives the investor a template for recognising the fourth one, whenever it arrives.

The first boom, 1994 to 1996, followed directly from the liberalization of the banking sector and the licensing of new joint-venture commercial banks through the late 1980s and early 1990s. NRB research identifies credit-to-GDP growth rates of 20.9 percent in 1994, 29.2 percent in 1995, and 16.4 percent in 1996, an extraordinary pace of financial deepening for an economy that had, only a few years earlier, operated under near-total state control of credit allocation. NEPSE itself was in its infancy during this period, having only begun operations in 1994, so the equity-market echo of this first boom is harder to document with index data, but the same institutional over-extension that characterised this period, undercapitalized new entrants competing aggressively for loan volume, later showed up as a nonperforming loan problem across the sector by the end of the decade.

The second boom, running from roughly 2007 through 2010, is the one every Nepali investor over the age of forty still remembers, because it centred on real estate and housing finance in a way that directly entangled bank balance sheets, land prices, and NEPSE. Credit-to-GDP rose from about 43.5 percent in 2007 to roughly 56 percent by 2009, an increase driven overwhelmingly by real estate and housing lending as banks, flush with post-conflict-era liquidity and remittance-driven deposit growth, competed to finance land purchases and residential construction in the Kathmandu Valley and other urban centres. Land prices in parts of Kathmandu and Lalitpur rose several-fold within two to three years. NEPSE, still a shallow market at the time, participated in the same speculative logic: bank and finance company shares, which were also the primary vehicles through which retail investors could gain leveraged exposure to the credit boom, rose sharply through 2008 into early 2010. When NRB moved to rein in real estate exposure, imposing sector-wise lending caps and tightening real estate loan classification rules in response to visible asset-price distortion and rising nonperforming loans at several finance companies, the reversal was severe. Credit-to-GDP fell back to roughly 45.8 percent by 2012, several finance companies and a few development banks failed outright or were merged under regulatory pressure, and NEPSE entered a multi-year bear market that did not find a durable bottom until the low 300s in index terms in 2011, a fall of well over half from its pre-crisis level.

The third and most severe boom is the one most relevant to any investor active in the market today, because its aftershocks are still shaping regulatory policy in 2025 and 2026. Credit-to-GDP surged from 75.3 percent in 2019 to a record 95.03 percent in 2022, the sharpest three-year expansion in the dataset. The proximate cause was the monetary response to COVID-19: NRB cut policy rates, relaxed loan classification and provisioning rules to support pandemic-affected borrowers, and injected substantial refinancing liquidity, at precisely the moment that remittance inflows, spent domestically because international travel was frozen, were pushing bank deposits to record levels. Banks holding surplus liquidity and facing negligible real-economy loan demand (construction was halted, tourism was dead, import-dependent trade was disrupted) redirected credit aggressively toward margin lending, real estate, and consumption finance, precisely the categories with the fastest transmission into NEPSE. The index, which had traded near 1,184 points as recently as mid-2018, and had touched a low of roughly 1,189 points in June 2020 during the initial pandemic shock, then rose in an almost uninterrupted climb to an all-time closing high of 3,198.60 on 18 August 2021, a gain of roughly 170 percent from both its 2018 level and its pandemic low — a 2.7-fold multiple — achieved in barely fourteen months.

The unwind that followed the 2021 peak was, in its mechanics, a smaller and faster replay of 2009 to 2012. As the credit-to-deposit ratio approached and then breached the regulatory ceiling of 90 percent in 2022, banks simply stopped extending fresh loans of any kind, including margin loans, regardless of a borrower's creditworthiness or collateral quality, because the constraint was systemic liquidity, not individual risk assessment. Deposit growth of only about 4.1 percent against credit growth of 10.5 percent over the same period pushed the sector into a structural funding gap. Interest rates, both on deposits (to attract scarce liquidity) and on loans (passed through from a higher cost of funds), rose sharply within a single fiscal year, compressing valuations across the board and triggering exactly the kind of forced margin-loan liquidation that amplifies a downturn. The lesson repeats across all three cycles: NEPSE booms are credit booms wearing an equity-market costume, and NEPSE busts are credit contractions enforced by the same regulatory ceilings, most notably the credit-to-deposit ratio, that permitted the boom to run as far as it did.

Lesson 2.3 — Margin Lending Mechanics: How Nepalis Borrow to Buy Shares

Margin lending, in the Nepali institutional context, refers specifically to loans extended by "A," "B," and "C" class banks and financial institutions against listed shares pledged as collateral, typically through the borrower's demat account, with the loan proceeds usable for further share purchase or general liquidity needs. It is functionally distinct from the margin trading offered directly by some brokerage houses in more developed markets, though Nepal has in recent years also begun permitting licensed stockbrokers, subject to SEBON approval, to extend limited margin facilities of their own, in addition to the much larger bank-originated margin loan market that this chapter focuses on.

The regulatory architecture governing bank margin lending in Nepal rests on four parameters that NRB has adjusted repeatedly over the past decade, each adjustment materially affecting how much leveraged buying power the system as a whole can generate. The first parameter is the loan-to-value ratio, the maximum percentage of a share's value (typically the lower of the 180-day average price or the latest traded price) that a bank may lend against. The second is the aggregate exposure limit, the share of a bank's core capital that may be committed to margin lending in total. The third, until its removal in late 2025, was the single-customer limit, a fixed rupee ceiling on how much any one borrower could draw across the system. The fourth is the risk weight assigned to margin loans for capital adequacy purposes, which determines how much regulatory capital a bank must hold against its margin book and therefore how profitable, and how attractive, margin lending is relative to other uses of a bank's balance sheet.

Regulatory Evolution: Margin Lending Limits

The table below traces the four parameters through their major regulatory revisions since 2018, the period for which detailed circular-level data is available and verifiable.

The direction of every single one of these six revisions has been toward greater system-wide leverage capacity, a pattern that is itself diagnostic: Nepal's regulator has used margin lending policy as a lever to stimulate secondary market activity and, indirectly, primary issuance appetite, during periods when it judged the broader credit cycle to need support, most visibly through 2024 and 2025 as the post-2021 correction dragged on and NEPSE struggled to sustainably clear the 2,800 to 3,000 range.

The practical consequence of the October 2025 removal of the single-customer limit deserves particular emphasis, because it materially changed the concentration risk profile of the margin loan market. Prior to removal, a wealthy investor's capacity to leverage into shares through any single bank was capped in absolute rupee terms (the ceiling had risen from an initial Rs 4 crore per institution in 2021-22 to Rs 25 crore, or Rs 250 million, by the FY2025/26 monetary policy), which meant large investors had to spread margin borrowing across multiple institutions to fully leverage a large equity position, a friction that slowed the pace at which any single actor could build a highly leveraged book. With that ceiling removed, a bank's aggregate 40 percent of core capital limit is now the only binding constraint, and because the combined core capital of the twenty-odd commercial banks was estimated at roughly Rs 600 billion in mid-2025 (against which roughly Rs 120 billion of margin lending capacity had already been drawn, and a further Rs 120 billion of the total roughly Rs 240 billion system-wide ceiling remained available), a small number of large, well-connected borrowers can now, in principle, absorb a disproportionate share of any single bank's remaining margin lending headroom. Nabil Bank, Global IME Bank, and Kumari Bank were, as of mid-2025 disclosures, among the largest disbursers of margin loans in absolute terms, while the newly merged Nepal Investment Mega Bank carried the largest remaining unutilized capacity of any single institution, and Siddhartha Bank the least.

The mechanics of a margin call in the Nepali system work as follows, and every investor using margin facilities should have this sequence memorised rather than merely understood in the abstract. A bank values the pledged shares daily or near-daily against the prevailing market price. If the loan-to-value ratio implied by a falling share price breaches the bank's internal maintenance threshold, typically set somewhat below the maximum disbursement LTV to provide a buffer, the bank issues a margin call requiring the borrower to either inject additional cash or additional collateral, or accept partial forced liquidation of the pledged shares to restore the required LTV. Because margin loans in Nepal are concentrated in a relatively small set of frequently pledged large-cap counters, a broad market decline that triggers margin calls across many borrowers simultaneously produces forced selling concentrated in the same handful of shares at the same time, which depresses those prices further, triggers further margin calls on other borrowers holding the same collateral, and can cascade into a self-reinforcing decline entirely independent of any change in the underlying companies' fundamentals. This is precisely the mechanism that amplified NEPSE's decline after the August 2021 peak, and it is the mechanism that Nepali financial commentary, including a widely discussed Kathmandu Post opinion column in mid-2026, has warned will recur with even greater force given the scale of margin lending liberalization enacted between 2024 and 2026.

Lesson 2.4 — Sector-wise Credit Caps and Real Estate Exposure

Beyond margin lending, NRB maintains, and periodically revises, a set of sector-wise exposure controls designed to prevent excessive concentration of bank credit in asset classes prone to speculative bubbles, real estate and housing chief among them. The logic mirrors margin lending regulation closely, and for good reason: real estate and equities are Nepal's two principal speculative asset classes, they are financed by the same pool of bank credit, and a boom in one frequently spills into the other, as the 2009-2010 episode demonstrated directly and the 2020-2021 episode demonstrated with equal force.

Historically, NRB has capped the combined share of a bank's loan portfolio that may be directed toward real estate and housing finance, with the specific ceiling adjusted upward and downward across different economic cycles depending on whether the regulator judged the sector to be underfinanced (as in the aftermath of the 2015 earthquake, when reconstruction financing needs argued for looser limits) or overheated (as in 2009-2010 and again to a lesser degree in 2021, when land price inflation and construction-sector credit growth argued for tighter limits). Within the broader real estate ceiling, residential housing loans to individual homebuyers have generally been treated more permissively than commercial real estate or land-purchase financing, on the theory that owner-occupied housing finance carries different risk characteristics and different social policy value than speculative land banking or commercial property development.

The most recent easing cycle illustrates the pattern clearly. Under the monetary policy for FY 2025/26, NRB raised the maximum housing loan amount eligible for the more favourable regulatory treatment from Rs 20 million to Rs 30 million, and set loan-to-value ratios at 80 percent for first-time homebuyers and 70 percent for other borrowers, an explicit loosening intended to stimulate a construction and real estate sector that had been in a multi-year slump following the 2021-2022 credit contraction. The same October 2025 circular (Asoj 22, 2082) that removed the margin-lending single-customer cap was formally framed as the removal of the Single Obligor Limit on share-backed loans — the Rs 25 crore (Rs 250 million) ceiling on total share-collateral borrowing by any one borrower or group of related parties across all banks combined. It is worth being precise about the scope: the removal applied specifically to share-backed lending, while the general concentration framework governing other loan categories (single-obligor exposure expressed as a percentage of a bank's core capital) remains in place. Even so, within the share-loan market the change removed the last absolute rupee brake on how large a single borrower's leveraged equity position can grow — leaving bank-level risk assessment and the aggregate 40 percent-of-core-capital ceiling as the only constraints.

The systemic risk implication of this concentration is visible directly in NRB's own collateral composition data. As of the most recent published breakdown for the first half of FY 2025/26, real estate-backed loans (including land and building pledged as collateral for loans that may be nominally classified under other purposes, such as working capital or margin lending) accounted for 63.9 percent of total outstanding bank credit, with current assets, covering both agricultural and non-agricultural working capital, making up a further 15 percent. This concentration means that Nepal's banking system, and by extension NEPSE, remains extraordinarily sensitive to real estate price movements even in periods when headline credit growth is directed nominally toward other sectors, because the collateral base underlying the majority of the loan book is a single, correlated asset class.

Sectoral Credit Growth, First Half of FY 2025/26

This table, drawn from NRB's own first-half FY 2025/26 macroeconomic release, is worth studying category by category, because it shows precisely where the marginal rupee of new credit was going during the period under review, and margin lending's 8.3 percent growth rate, more than double the 4.4 percent industrial production growth rate, and running well ahead of the 3.6 percent half-year growth rate for aggregate private-sector credit, confirms that even in a period of generally subdued credit expansion, share-collateral lending was capturing a disproportionate share of whatever new credit the system was willing to extend. An investor tracking this data series month to month gains an early read on whether liquidity is rotating toward speculative equity exposure or toward productive capacity, well before that rotation shows up in NEPSE turnover figures.

Lesson 2.5 — Reading Credit Growth Data as a Leading Indicator for NEPSE

NRB publishes detailed monthly and semi-annual macroeconomic and financial statistics, including the "Current Macroeconomic and Financial Situation" report and periodic monetary policy reviews, that break down credit growth by borrower type, sector, and institution category. These publications are freely available on NRB's website and are, in the authors' assessment, the single most underused research resource among Nepali retail investors, most of whom never look past the daily NEPSE ticker and quarterly company disclosures.

The most recent half-year data available as this chapter is written, covering the first six months of FY 2025/26 (mid-July 2025 to mid-January 2026), illustrates both the value and the limits of this data as a leading indicator. Private-sector credit grew by 3.6 percent over the six-month period, translating to roughly Rs 197.47 billion in new credit disbursed, against total outstanding credit of Rs 5,695.17 billion. On an annual point-to-point basis, credit growth stood at 6.7 percent, comfortably below the 12.0 percent full-year growth target set out in NRB's monetary policy for FY 2025/26, and also well below the roughly Rs 265.56 billion disbursed over the equivalent period one year earlier. Commercial banks grew their books by 3.7 percent over the half-year, development banks by 2.9 percent, and finance companies by only 1.2 percent, a hierarchy that itself tells a story: the smaller, higher-cost-of-funds institutions are the first to feel a credit slowdown and the first to see their growth compress when systemic liquidity tightens, making finance-company credit growth a useful early-warning signal that tends to turn before commercial-bank credit growth does.

The borrower-composition data carries a further diagnostic signal that is easy to overlook. As of the same H1 FY 2025/26 release, non-financial institutions (essentially corporate borrowers, including real estate developers, trading houses, and industrial concerns) accounted for 62.7 percent of outstanding credit, while individuals and households accounted for 37.3 percent. A rising household share of incremental credit growth, driven disproportionately by consumption lending (9.1 percent growth in this period, the fastest of any category) and margin lending (8.3 percent), rather than by productive corporate investment, is a signal that credit expansion is increasingly financing consumption and asset speculation rather than capacity expansion, a pattern that historically has proven less durable and more prone to sharp reversal than credit growth concentrated in industrial or export-oriented lending.

The investor's practical workflow should combine three data points, checked each time NRB releases updated figures, typically quarterly at minimum: the point-to-point private-sector credit growth rate relative to its own monetary policy target (a rate running persistently below target, as in the 6.7 percent actual against a 12.0 percent target seen in early FY 2025/26, signals a still-cautious lending environment in which NEPSE rallies are less likely to be credit-fuelled and more likely to reverse on thin follow-through); the credit-to-deposit ratio relative to the approximately 90 percent regulatory ceiling (a ratio climbing toward that ceiling, as happened in 2011 and again in 2022, is the single most reliable leading indicator of an imminent liquidity squeeze and NEPSE correction that this chapter can offer); and the growth rate of margin lending specifically relative to aggregate credit growth (margin lending growing meaningfully faster than the system average, as it has in most periods examined in this chapter, indicates that a disproportionate share of available credit is finding its way directly into share purchases, a condition that has historically preceded index appreciation in the near term but has also, without exception, preceded a sharper-than-average correction once the credit cycle turns).

Lesson 2.6 — Regulatory Risk: Why NRB's Next Circular Matters More Than Any Chart

Every mechanism described in this chapter, higher loan-to-value ceilings, the removal of single-customer and single-obligor limits, reduced risk weights on margin lending, expanded housing loan eligibility, can be reversed by NRB with a single unified directive, and Nepali financial history shows that the regulator has, in fact, reversed course sharply and with limited advance warning on multiple occasions. The 2009-2010 real estate tightening and the 2022 credit-to-deposit-ratio-driven lending freeze were both delivered with comparatively little lead time relative to the severity of their market impact, and in each case, investors who had built leveraged NEPSE positions on the assumption that regulatory conditions would remain stable were the ones who suffered the largest losses.

As of mid-2026, the regulatory trend has been unambiguously toward liberalization: the loan-to-value ceiling for margin lending has been raised to as high as 80 percent for scored companies, the single-customer (single obligor) limit on share-backed loans has been abolished, risk weights on margin lending have been progressively reduced, and housing finance eligibility has been expanded. Total margin lending outstanding of roughly Rs 162.9 billion as of mid-2026, though still only 2.7 percent of the total loan book, has grown over 110 percent in three years, and NEPSE itself, after peaking at 2,970 points in late March 2026 and falling to a low of 2,469 points in October 2025, was trading in the high 2,600s in July 2026, a level still well below the August 2021 all-time high but showing renewed sensitivity to exactly the same credit-driven dynamics described throughout this chapter. Total system-wide bank loans of roughly Rs 5,915 billion against deposits of roughly Rs 8,268 billion as of July 2026 imply a credit-to-deposit ratio still comfortably below the approximately 90 percent regulatory ceiling, which is itself informative: the current liberalization cycle has room to run further before it encounters the same systemic constraint that ended the 2021 boom, but that same fact means the eventual reversal, whenever the ratio does approach the ceiling again, is likely to be at least as abrupt as the 2022 episode, because NRB has repeatedly shown that it manages the credit-to-deposit ceiling as a hard constraint rather than a gradually tightened one.

The practical response for an investor is a discipline, not a forecast. First, never treat the current maximum loan-to-value ceiling, whatever it happens to be at the time of reading this chapter, as a stable parameter to be borrowed against at its limit; maintain a buffer well below the maximum permitted leverage, because the maintenance margin at which a bank issues a call is set below the disbursement ceiling precisely to protect the bank, not the borrower, and a falling market can close that buffer in days. Second, track the credit-to-deposit ratio and the point-to-point private-sector credit growth rate each time NRB publishes them, because both have historically moved against NEPSE with a lag of two to four quarters, giving an attentive investor real time to de-risk before a broad correction. Third, treat any sudden acceleration in margin lending growth relative to the aggregate credit growth rate, of the kind seen through 2020-2021 and again through 2024-2026, as a signal of rising systemic fragility in the specific large-cap counters that dominate margin loan books, rather than as confirmation that those counters are safe simply because they are widely held and heavily pledged. Fourth, recognise that a bank-dominated, real-estate-collateralized financial system of Nepal's structure will continue to produce credit cycles of comparable amplitude to 1994-96, 2008-10, and 2020-22 for the foreseeable future, and that NEPSE will continue to trade as a levered proxy on that cycle rather than as an independent reflection of corporate fundamentals, until the market's sectoral composition and financing structure change in ways that are not visible on the current horizon.