Microfinance bad loans pass 10% as a lending model built for the poor strains

Microfinance was supposed to be the bridge between Nepal's rural poor and formal credit. For a decade it worked well enough. Before 2022, less than 3% of microfinance loans were non-performing, according to the Kathmandu Post. By mid-July 2026 the figure had reached 10.42%.

Central bank data reported by Republica put non-performing loans at the country's retail microfinance institutions at Rs 50.82bn (about $328m) at the end of the 2025/26 fiscal year, up 64% from Rs 31.02bn a year earlier. Total lending was Rs 487.73bn (about $3.1bn), almost three-fifths of it classified as agricultural. A May analysis by Beema Post of 34 listed microlenders found 18 with bad-loan ratios above 10% and the worst above 23%.

The sector has nonetheless stayed profitable in aggregate, earning Rs 10.78bn last year, because provisions and capital buffers have so far absorbed the losses. The cost is falling on borrowers instead.

The blacklist

More than 21,500 microfinance borrowers were placed on the national credit blacklist in 2025/26, the Post reported on 30 September, citing the Credit Information Centre. The comparable figure was 710 in 2022/23, 3,600 the year after and 5,800 in 2024/25. Microfinance borrowers made up about 36% of all new blacklistings last year.

Being blacklisted shuts a household out of formal credit entirely. For many, the only remaining lenders are relatives or informal moneylenders. A 2022 central bank survey cited by the Post found that 72% of adults already relied on moneylenders or family for saving or borrowing.

The Post's reporting points to several causes: a sluggish economy and falling rural incomes; aggressive lending in earlier years, when borrowers took loans from five or more institutions at once; and campaigns that told borrowers they need not repay. Tighter rules have also squeezed some borrowers who had used new loans to service old ones.

A regulator catching up

The central bank has acted, though often after the damage. In February 2023 it banned borrowers from taking loans from multiple microlenders and has since limited them to two. It caps microfinance interest at 15% a year plus a 1.5% service charge, and in 2023 ordered lenders to refund Rs 1.6bn in excess service charges. The central bank's spokesperson acknowledged to the Post that regulation came late. Consolidation has also cut the number of institutions, from 91 in December 2019 to about 50 today.

Meter byaj

Below the regulated tier sits meter byaj, a Nepali term for informal loans whose interest compounds so quickly that borrowers compare it to a running taxi meter. Lenders often hold land documents or signed cheques as security and seize property when debts become unpayable.

Victims have marched on Kathmandu three times. The most recent began in Janakpur on 9 July 2026, organised by Kisan Mazdoor Andolan Nepal under Avadhesh Kushwaha. The march paused at Nijgadh, in Bara district, during talks, and on 17 July a government team led by Pushkar Sapkota, secretary at the Prime Minister's Office, signed a nine-point agreement with them.

The government agreed to recommend that illegal moneylending be declared a criminal offence, which would void fraudulent loan documents; to have the Home Ministry draft a dedicated law within three months; to return seized property with compensation; and to set up district committees to settle complaints within six months. Days later the government declared forged meter byaj documents illegal. The three-month deadline for the draft law falls on 17 October 2026.

Formal lenders have moved in the same direction. A cooperative ordinance gazetted in May caps the total interest a cooperative can collect from a borrower at the size of the original loan.

The risk

The danger is a squeeze from both sides. As microlenders retreat and blacklist defaulters, informal lenders gain customers. Unless the new moneylending law is passed and enforced, and unless the microfinance sector finds a way to restructure rather than simply write off its weaker borrowers, the households that microfinance was designed to reach may end up back where they started.