Kathmandu – Nepal’s banking sector, already grappling with loan recovery challenges, is now facing additional pressure from the digital lending service known as “Foneloan.” Introduced to support the nation’s push toward digitization, this service offered via mobile apps initially gained popularity for its ease and accessibility. However, the very simplicity of the system is now creating complications in loan recovery.

With many banks and financial institutions offering collateral-free loans through mobile applications, recovering these loans has proven to be increasingly difficult. While most borrowers repay on time, instances of misuse and non-payment especially by malicious users have started to strain lenders.

Nabil Bank was the pioneer in introducing Foneloans in Nepal, later followed by other commercial banks including Kumari Bank, Everest Bank, NIC Asia, Prabhu Bank, Machhapuchchhre Bank, Citizens Bank, and Agricultural Development Bank. These institutions provided loans Upto 5 lakh, based on banking transaction, income history, transaction behavior etc other qualifying requirements.

Recovery Challenges Lead to Policy Shifts

Due to mounting recovery issues, some banks have now placed a temporary hold on issuing new fone loans. Despite the halt, outstanding loans from fone lending have exceeded NPR 9.63 billion, spread across 370,000 borrowers.

In a recent incident, Nabil Bank publicly named defaulters who failed to repay their foneloan. The growing risk in recovering such loans has made banks more cautious about further digital credit investment.

Experts suggest that the problem partly stems from a lack of rigorous documentation. Analysts also point to a race among banks to increase their digital customer base, which led to a focus on quantity over quality.

A senior executive from a major commercial bank admitted that the simplified approval process and poor risk assessment contributed to rising defaults. “Since the credit history of many borrowers wasn’t reviewed properly, the risk of default has increased,” he said.

Small Loans, Big Oversights

Despite these concerns, banks have continued to treat foneloan as minor transactions due to their small amounts. As a result, many institutions failed to take timely action, allowing the default rate to creep up.

Govinda Ghimire, CEO of NMB Bank, downplayed the issue, stating that foneloan are issued only to salaried individuals with proven repayment capacity. He insisted that the situation isn’t alarming and that the loans are being managed well.

According to the guidelines issued by Nepal Rastra Bank in 2021, digital loans of up to NPR 500,000 can be provided to individuals with salary or professional income accounts, while other customers may access up to NPR 200,000. These loans can be repaid in lump sum or installments within a maximum tenure of three years.

Sagar Sharma, CEO of Foneloan, also asserted that serious problems are not evident. He noted that the service was designed to bridge the gap between banks and customers by offering small emergency loans. “So far, only around 1.79% of the NPR 9 billion-plus disbursed through Foneloan has turned into non-performing loans (NPL),” Sharma told Banking News.

The data was previously incorrect, so it has been corrected.