Nepal’s Banking Sector Under Stress: How the Gen Z Movement Sparked a Surge in Bad Loans
Nepal’s inflation has cooled to 1.11% year-on-year as of mid-November 2025. That is a welcome headline for households. But a low inflation print does not automatically mean borrowers are healthy. Inside the banking system, stress is rising—because the problem is less about prices, and more about disrupted cashflows.
The Gen Z movement (the youth-led protests that erupted in early September) has become an unexpected credit shock. It damaged assets, interrupted business activity, and slowed loan recovery at a time when the economy was already fragile.
When streets close, repayments slip
Credit risk in Nepal is often a cashflow story. Many SMEs and traders rely on daily turnover. So, when protests turn into shutdowns, the chain reaction is fast:
Sales fall. Collections slow. Installments get missed.
A few missed EMIs can push a loan into stress, especially for borrowers without buffers. Even when banks try rescheduling, repayment discipline does not fully return until commerce normalizes.
The economic hit was not small
Multiple estimates show the unrest carried a real financial cost. A Reuters report cited a government statement that put losses at more than $586 million in an economy of about $42 billion, with rebuilding costs projected above $252 million. Physical damage assessments also placed losses around Rs 84.45 billion, including damaged buildings and vehicles. In a separate forum, Finance Minister Rameshwar Khanal said damages were around Rs 78 billion, split between the private sector and the government.
The numbers differ because they measure different things (economic loss vs. physical damage vs. reported damage splits). But the message is consistent: the shock was real—and banks feel it through borrower stress.
NPLs cross a psychological line
According to Nepal Rastra Bank (NRB) data, the average non-performing loan (NPL) ratio of commercial banks reached 5.03% as of mid-November—up from 4.28% a year earlier. Development banks reported 6.03%, and finance companies 12.52%.
This is more than a statistic. Around 5% is a psychological line: it usually triggers tighter underwriting, higher provisioning, and slower credit growth—exactly what the real economy does not want during recovery.
Sector-by-sector: where the pain concentrates
Commercial banks may be more diversified, but rising NPLs still change behavior: stricter collateral haircuts, slower approvals, and less room for “relationship lending.”
Development banks are often more concentrated in specific provinces and borrower segments, so stress shows up faster in their books.
Finance companies tend to sit closer to higher-risk retail and SME exposures. Their double-digit NPL ratio is a warning sign that pockets of the credit market are already in “repair mode.”
Policy response: why confidence is a macro variable
In December, the government and Gen Z representatives signed a 10-point agreement covering recognition and compensation for victims, investigations into incidents, anti-corruption measures, governance and electoral reforms, and commitments on digital rights. These signals matter: stability is not only political—it is financial.
Investor lens: what to watch next
Lower inflation can support easier financial conditions. But rising NPLs can compress bank earnings through higher provisions and slower loan growth.
Three metrics will likely shape sentiment in the coming quarters:
- provisioning trends in quarterly bank results,
- NRB guidance on classification and restructuring, and
- whether credit growth returns without weakening underwriting quality.
The Gen Z movement forced a national reset. Now the banking sector is doing a quieter reset—through balance sheets. The path forward is simple to say, hard to execute: rebuild confidence, repair cashflows, and restore credit discipline without choking growth.
Author Bio
Kriti Jha is an investor and the founder of PrimeTrust Investments, a finance-focused platform that simplifies Nepal’s economy, banking, market developments and company analysis for general audiences. He writes data-backed, practical explainers that connect macro headlines with everyday financial realities.
