- Nepal’s financial system remains stable with strong remittance inflows and foreign exchange reserves, but it faces weak credit demand, excess banking liquidity, and persistent trade deficits.
- The country is undergoing rapid financial transformation through expanding transaction banking and digital payments, including mobile banking, QR systems, and cross-border payment integration with India.
- Hydropower exports are emerging as a strategic economic driver that could diversify Nepal’s exports and gradually reduce reliance on low-value re-exports and petroleum imports.
Nepal’s financial system, by all accounts, is stable. It is characterised by strong remittance inflows, rising foreign exchange reserves, and a sustained balance-of-payments surplus.
Yet beneath this ostensible strength, the country is contending with subdued credit demand, excess liquidity within the banking system, and persistent trade imbalances.
Recent political developments, including the decisive victory of the new party, Rastriya Swatantra Party in last week’s general election, add a layer of optimism, pledging against corruption and for structural reform.
Four interconnected pillars – cross-border trade, transaction banking, digital payments, and commodities – are emerging as the primary drivers of Nepal’s financial and economic transformation.
Cross-border trade: Expansion amid structural concentration
Nepal’s cross-border trade performance during the 2025–2026 period reflects a dual narrative of strong export growth alongside persistent structural imbalances. Merchandise exports have expanded significantly, recording growth exceeding 40% during the first half of the fiscal year. However, this growth remains heavily concentrated in a limited set of commodities, particularly processed soybean and palm oil, primarily exported to India.
This concentration exposes Nepal to external policy and market risks. Much of the edible oil trade relies on tariff arbitrage under regional trade arrangements, where raw materials are imported, minimally processed domestically, and then re-exported. While this boosts headline export figures, domestic value addition remains low, raising concerns regarding the long-term sustainability of this model.
Meanwhile, imports continue to dominate Nepal’s trade structure, exceeding NPR 1 trillion (approximately $7 billion) annually. Petroleum products remain the largest import category, creating a structural drain on foreign exchange despite comfortable reserve levels.
Nepal’s trade deficit – particularly with India – remains substantial and may widen further due to reconstruction-related imports and rising domestic consumption.
Transaction banking: From lending-led growth to fee-based models
Nepal’s banking sector is shifting structurally, from traditional lending-driven models toward transaction-led banking. This transition is largely driven by excess liquidity and subdued credit demand.
Deposits have grown rapidly, supported by record remittance inflows, while credit expansion has remained moderate. As a result, the credit-to-deposit ratio has declined significantly, reflecting underutilised liquidity within the banking system.
Despite accommodative measures by Nepal Rastra Bank (NRB), including lower policy rates and liquidity management operations, private sector borrowing has not accelerated meaningfully. This imbalance is encouraging banks to diversify revenue streams.
Transaction banking, including trade finance, cash management, remittance handling, and cross-border payment services, is increasingly emerging as a core business segment rather than a supporting function.
The sector is also undergoing consolidation. Mergers have reduced the number of commercial banks, resulting in larger institutions with stronger balance sheets and improved capacity to finance infrastructure projects and manage complex cross-border transactions.
However, rising non-performing loans (NPLs) and cautious lending behaviour remain key constraints. As banks prioritise risk management and balance sheet stability, credit expansion may remain moderate, further reinforcing the shift toward fee-based income models.
Payments: Rapid digitalisation and regional integration
Similarly to its banking sector, the country’s payment ecosystem is witnessing one of the most significant transformations in its financial history. Digital transactions have surged dramatically due to the widespread adoption of mobile banking, QR-based payments, and digital platforms.
Systems such as connectIPS, coupled with QR payment networks, have become central to everyday financial transactions, significantly reducing reliance on cash while lowering transaction costs and settlement friction.
The number of cheques presented in the banking system declined by nearly 9% during the fiscal year 2022–2023, reflecting growing public confidence in real-time digital settlement systems.
Regulatory developments are further accelerating this transition. Proposed amendments to the NRB Act aim to formally recognise payment service providers (PSPs) and payment system operators (PSOs) as financial institutions.
The introduction of digital-only banks is expected to reshape the competitive landscape by reducing operational costs and expanding credit access for small and medium-sized enterprises (SMEs).
A significant milestone has been the introduction of cross-border QR payment integration with India, enabling seamless retail payments for tourists and travellers. Similar initiatives with China and other Asian markets are under development, indicating a broader strategy of regional payment integration.
Despite these advances, challenges remain. Digital adoption continues to be uneven across the country, with rural areas still heavily reliant on cash due to infrastructure limitations and digital literacy gaps. Bridging this digital divide will be essential for achieving inclusive financial transformation.
Commodities: From re-exports to energy-led transformation
Nepal’s commodity sector is gradually transitioning toward a more diversified export structure. While edible oils continue to dominate export growth, the emergence of electricity as a tradable commodity represents a significant structural turning point.
With the world’s second-largest freshwater reserves, Nepal possesses vast hydropower potential estimated at around 83 gigawatts.
Hydropower exports have increased steadily, positioning Nepal as a potential regional energy supplier. Seasonal electricity exports to India are already contributing to foreign exchange earnings and partially offsetting the trade deficit.
Over the long term, hydropower has the potential to fundamentally reshape Nepal’s export profile, reducing reliance on low-value re-export activities. Exports of traditional products such as jute goods, large cardamom, and zinc sheets have also been expanding steadily, indicating gradual diversification into niche markets.
On the import side, petroleum products continue to dominate Nepal’s import basket. However, their relative importance may decline over time as domestic hydropower capacity expands and the country transitions toward cleaner energy sources.
Nepal is also witnessing a growing shift toward electric vehicles (EVs), which accounted for more than 70% of imported four-wheeled passenger vehicles in 2024. This reflects a broader move toward energy sustainability and reduced reliance on fossil fuels.
Overall, Nepal’s commodity landscape is evolving from a consumption-driven import model toward a more balanced structure, with emerging export capabilities in energy and specialised agricultural products.
Industry outlook: Opportunities within structural constraints
Nepal’s financial and trade ecosystem stands at a pivotal juncture. Strong external buffers, including high foreign exchange reserves, a current account surplus, and relatively stable inflation, provide a solid macroeconomic foundation.
Nevertheless, several structural challenges remain:
- Heavy reliance on remittances for liquidity and consumption
- Persistent trade deficits driven by import dependence
- A concentrated export base with limited value addition
- Weak domestic credit demand and rising financial sector risks
Within this context, several key industry trends are likely to shape the sector’s trajectory:
- Continued expansion of transaction banking as banks shift toward fee-based income models
- Rapid growth of cross-border payment systems through QR and digital platforms
- Increasing electricity exports, positioning hydropower as a strategic national asset
- Gradual trade diversification, although still constrained by structural limitations
Nepal’s economic transformation in the 2025–2026 fiscal period reflects the convergence of digital innovation, evolving trade dynamics, and emerging shifts in the commodity landscape.
The historic 2026 election, which delivered a decisive mandate to the reform-oriented Rastriya Swatantra Party, adds a new dimension of optimism. This potential for political steadiness and a clear public mandate place Nepal in a position where economic stability and financial innovation can translate into sustainable growth.
With strong governance, structural economic reforms, and action against corruption – which had defined Nepali politics for decades – the country can take tangible steps toward prosperity, driven largely by the strong civic engagement of its youth.
