Banks Awash with Cash as Credit Demand Falters, Interest Rates Continue to Slide

Kathmandu — Nepal’s banking system is sitting on a growing pool of lendable funds, but businesses and households are not borrowing at the same pace. The widening mismatch between deposit growth and credit expansion has pushed interest rates steadily lower, creating cheaper financing for borrowers but also signalling persistent weakness in private-sector investment.

Latest economic and financial data show that virtually every major interest-rate indicator has declined from a year earlier. Treasury bill yields, interbank rates, banks’ base rates and both deposit and lending rates have moved downward, reflecting an environment in which money is readily available but demand for it remains limited.

The clearest indication comes from commercial banks. Their deposits increased from Rs 6.53 trillion to about Rs 7.50 trillion over a year, an addition of roughly Rs 967.42 billion. This translates into deposit growth of about 14.8 percent.

Credit, however, expanded at less than half that pace. Commercial banks’ outstanding loans increased from Rs 4.97 trillion to Rs 5.29 trillion, an increase of only around Rs 315 billion, or 6.33 percent.

The difference is substantial. For every rupee of additional credit extended during the period, banks received more than three rupees in new deposits. This has left an increasing portion of banking resources searching for borrowers.

A simple comparison of aggregate commercial bank loans against deposits also illustrates the shift. Loans were equivalent to roughly 76 percent of deposits a year earlier, but the ratio has fallen to about 71 percent based on the latest figures. While this is not the regulatory credit-to-deposit ratio used by Nepal Rastra Bank, the comparison shows how deposits have been growing much faster than lending.

Lending rates fall as banks compete for borrowers

The excess liquidity is increasingly visible in interest rates. The average base rate of commercial banks fell from 6.09 percent to 4.88 percent, a decline of 1.21 percentage points within a year.

Average lending rates dropped even more sharply, falling from 7.99 percent to 6.64 percent. Borrowers are therefore paying, on average, 1.35 percentage points less than they were a year earlier.

Deposit rates have followed the same direction. The weighted average deposit rate of commercial banks declined from 4.29 percent to 3.29 percent.

The numbers suggest that banks no longer need to compete aggressively for deposits. Instead, the pressure has shifted to the lending side, where institutions are competing to find credible borrowers capable of absorbing the liquidity accumulated in the system.

The difference between average lending and deposit rates also narrowed from about 3.70 percentage points to 3.35 percentage points. This suggests that banks are not simply reducing what they pay depositors; competitive pressure is also forcing them to offer loans at lower rates.

A similar pattern can be seen among development banks and finance companies. Development banks’ base rate declined from 8.29 percent to 6.86 percent, while that of finance companies dropped from 9.02 percent to 7.16 percent.

Development banks’ average lending rate fell from 9.40 percent to 7.71 percent, while finance companies saw their average lending rate decline from 10.22 percent to 8.90 percent.

Short-term market rates point to abundant liquidity

Money-market indicators tell the same story.

The weighted average yield on 91-day Treasury bills declined from 2.94 percent to 2.64 percent, while the interbank rate fell from 2.99 percent to 2.73 percent.

Low interbank rates generally indicate that banks do not face significant difficulty obtaining short-term funds from one another. Likewise, subdued Treasury bill yields point to strong demand for safe short-term instruments at a time when banks have limited alternatives for deploying surplus liquidity.

Nepal Rastra Bank has repeatedly absorbed liquidity through open-market operations, but excess funds have continued to remain in the financial system.

The situation therefore differs sharply from periods when banks struggled for deposits and pushed interest rates higher to secure funds. Banks currently have money to lend; what they lack is sufficient demand from qualified borrowers.

Why are businesses still reluctant to borrow?

Falling interest rates would normally be expected to encourage businesses to invest and households to borrow. Yet credit growth of just 6.33 percent suggests that cheaper money alone has not been enough to generate a strong lending cycle.

Banking-sector officials attribute the weakness to subdued activity across industry, trade, construction and services. Businesses operating below capacity have little reason to take on new debt to expand production.

Weak consumer demand has added another layer of pressure. When businesses are uncertain about sales, they are less likely to invest in new factories, machinery, inventories or expansion projects, regardless of how inexpensive bank loans become.

Private-sector confidence also remains an important factor. Policy uncertainty, slow government capital expenditure, limited investment opportunities and weak business sentiment can make entrepreneurs reluctant to take on long-term financial obligations.

The weakness in sectors that traditionally absorb significant bank credit, including property, construction and parts of the capital market, has further limited lending opportunities.

Banks themselves have become more cautious

Weak borrower demand is only one side of the story. Banks have also become more selective about whom they are willing to finance.

As non-performing loans have increased across the financial sector in recent years, banks have strengthened scrutiny of borrowers’ cash flow, balance sheets, repayment capacity and project viability.

Consequently, a business may be willing to borrow and a bank may have the liquidity to lend, yet a transaction can still fail to materialise if the borrower does not meet stricter credit standards.

Capital constraints at some institutions may also limit their ability to expand lending aggressively, even when liquidity is abundant. This means that the present slowdown in credit cannot be explained solely by interest rates or the amount of cash available in banks.

Remittances continue to swell deposits

While credit demand has remained subdued, deposits have continued to rise, supported partly by strong remittance inflows.

A significant share of money entering the country eventually reaches the banking system. With limited alternative investment opportunities, households and institutions continue to keep large amounts of savings in bank accounts even as deposit returns fall.

Total deposits across the broader banking system have already exceeded Rs 8.29 trillion, according to the figures provided.

Among commercial banks, Global IME Bank held the largest deposit base at around Rs 700.04 billion, followed by Rastriya Banijya Bank at Rs 681 billion and Nabil Bank at Rs 601 billion.

In terms of deposit growth, Rastriya Banijya Bank recorded the strongest expansion at 37.99 percent, followed by Nepal Bank at 24.71 percent, Global IME Bank at 21.81 percent, Agricultural Development Bank at 19.76 percent and Machhapuchchhre Bank at 19.50 percent.

Nabil leads in loans, but performance varies widely

On the lending side, Nabil Bank had the largest loan portfolio at around Rs 487 billion, followed by Global IME Bank at Rs 476 billion.

Nepal Investment Mega Bank had extended around Rs 360 billion in credit, while Rastriya Banijya Bank and Laxmi Sunrise Bank reported loan portfolios of around Rs 346 billion and Rs 320 billion, respectively.

Machhapuchchhre Bank recorded the fastest credit growth at 16.46 percent. Nabil Bank followed with 12.52 percent, while Rastriya Banijya Bank posted growth of 12.24 percent.

The sector-wide weakness, however, is also visible in banks whose loan portfolios contracted. Credit declined by around Rs 8 billion at Prabhu Bank, Rs 28 billion at NIC Asia Bank and Rs 17 billion at Standard Chartered Bank Nepal compared with the previous year.

Such differences suggest that the lending slowdown is not affecting every bank in the same manner. Institutions with stronger capital positions, asset quality and access to viable borrowers appear better placed to expand credit, while others are concentrating on balance-sheet management and asset quality.

Cheap money does not automatically mean economic recovery

Lower lending rates are positive for borrowers. Businesses taking new loans face lower financing costs, while borrowers whose loans are linked to banks’ base rates can also benefit as benchmark rates decline.

In principle, cheaper credit can support investment in manufacturing, construction, tourism, infrastructure and other productive sectors. Lower financing costs can also improve the viability of projects that may previously have been too expensive to undertake.

But the present figures reveal an important limitation of monetary easing: reducing the price of credit cannot by itself create investment demand.

Businesses borrow when they expect new investment to generate sufficient returns. If consumption is weak, factories are underutilised and entrepreneurs remain uncertain about future economic conditions, even a substantial fall in borrowing costs may fail to trigger investment.

The challenge facing Nepal’s financial system has therefore shifted. Banks are no longer primarily struggling to mobilise resources. They are struggling to convert those resources into productive loans.

For depositors, meanwhile, the trend has a downside. Lower deposit rates mean reduced income from savings and fixed deposits, particularly affecting households, pensioners and institutions that depend heavily on interest income.

Unless private investment, consumer demand and overall economic activity strengthen significantly, the imbalance between deposits and loans is likely to persist. That would keep pressure on banks to compete for borrowers and could keep interest rates at relatively low levels.

The data ultimately point to a broader economic problem rather than a purely banking-sector one: Nepal has liquidity, and borrowing costs have fallen, but the economy has yet to generate enough confidence and viable investment opportunities to put that money fully to work.