Kathmandu – Nepal’s banking sector, already grappling with loan recovery challenges, is now facing increasing difficulties recovering loans disbursed through ‘Phone Loan’ services. In recent years, banks and financial institutions embraced digitization, offering small loans via mobile applications. This approach gained popularity due to its simplicity and quick access.

However, as the service expanded, recovery has become equally problematic. Though many borrowers repay these collateral-free loans, a growing number of defaulters have created significant burdens for banks. These digital loans were often provided based solely on a mobile number and national ID, without deeper verification.

Nabil Bank was the first to launch phone loans in Nepal, and soon Kumari, Everest, NIC Asia, Prabhu, Machhapuchchhre, Citizens, and Agricultural Development Bank, among others, followed suit. These banks typically offered loans of up to NPR 100,000–200,000, based on a borrower’s last six months of salary.

Recovery Crisis Forces Strategy Shifts

As loan recovery issues intensified, some banks have temporarily halted phone loan disbursements. Despite the pause, over NPR 90.3 billion in loans have already been disbursed to more than 370,000 borrowers through this channel.

In response to non-repayments, banks like Nabil have already publicly disclosed names of defaulting borrowers. The worsening recovery rates have forced financial institutions to reconsider further investments in this model. Experts note that the ease of accessing credit through digital platforms has encouraged misuse, especially due to inadequate verification of documents and weak credit assessments.

Competition Compromised Credit Quality

As competition to expand customer base intensified, banks prioritized loan volume over borrower quality. A senior officer at a commercial bank commented, “The simplified approval process weakened risk assessment. Without checking credit history properly, default risks have increased significantly.”

Bankers have shown limited concern over recovering these small-sized loans. However, phone loans now reportedly account for approximately 30% of the total non-performing loans (NPLs) of many banks.

Despite this, NMB Bank CEO Govinda Ghimire remains optimistic. He argued that since the loans are small and targeted primarily at salaried individuals with repayment capacity, the situation is not alarming. He claims the bank evaluates clients’ repayment ability before disbursing such loans.

Regulatory Framework

Nepal Rastra Bank (NRB), the central bank, permits banks to provide digital loans of up to NPR 500,000 under its Digital Lending Guidelines 2078 B.S. (2021 A.D.). The limit is NPR 500,000 for customers with salaried or professional income accounts, and up to NPR 200,000 for other clients. Such loans can have a maximum tenure of three years and can be repaid either in installments or lump sum.