Evaluating Consumer Creditworthiness in Nepal: Mechanisms, Gaps, and Reforms

Consumer Creditworthiness, Credit Risk, Non-Performing Loans, Credit Reporting System, Nepal

This paper explores how consumer creditworthiness is measured in Nepal, what are the current gaps, and how the policy can be reformed to promote financial stability and inclusion. Although there is an improvement in opening up access to finance, credit worthiness in Nepal is more of a collateral and income-based assessment with little regard on borrowers' repayment history. The increasing non-performing loan (NPL) ratio 1.3 per cent in June 2022 to 3.9 per cent in FY 2023/24 is an indication of the increasing credit risk under the current practice. The study sampled 150 loan officers in 20 A-grade commercial banks in Kathmandu, Lalitpur, Bhaktapur, Chitwan and Pokhara using a mixed-method design, where primary data was collected. The secondary data were recorded using structured questionnaires and interviews and also through Nepal Rastra Bank reports and bank publications. The analysis was done through thematic interpretation and further through the data analysis using MS Excel and SPSS. The findings indicated that although 95 percent of banks will check credit history before issuing approval, 19 percent do not have standard systems. The key obstacles are the verifying informal income (34%), poor documentation (28%), and the high cost of field verification (15%). As well, uneven income, poor misappropriation of funds, and poor monitoring were stated as the major causes of defaulting small loans. The article concludes with the necessity of an obligatory credit rating system, default reporting, and digital KYC. The effect of such reforms will be the reduction of default risks, encouragement of responsible lending, and the establishment of trust in the banking sector in Nepal. Enhancing credit governance is thus crucial towards sustainable economic growth and inclusive growth.