Banks Overflowing with Cash and Falling Interest Rates, Yet Credit Demand Remains Sluggish

Kathmandu — Despite ample liquidity in the banking system, plunging interest rates, and cheaper borrowing costs, credit demand in Nepal has failed to pick up the expected pace. By the fourth quarter of the fiscal year 2082/83, the average base rate of all 20 commercial banks dropped sharply to 4.86%, down from 6.04% during the same period the previous year—representing a 1.18 percentage point decline within a year.

Driven by lower deposit costs and intense competition among banks, base rates have steadily tumbled, with institutions like Nepal Investment Mega Bank seeing drops of up to 1.80 percentage points. While this environment makes borrowing cheaper for debtors, it squeezes returns for traditional savers. However, unlike previous liquidity crunches, the core issue is no longer a lack of bank capital, but rather a severe lack of profitable investment projects and credit demand.

Low Interest Rates Fail to Excite Businesses Even with affordable borrowing rates, entrepreneurs remain reluctant to take out new loans due to weak aggregate market demand, underutilized industrial capacities, and sluggish trade and construction activities. Although sectors like real estate have shown minor improvements, they have not triggered significant credit expansion. For business owners, the critical question has shifted from "How low is the interest rate?" to "Will an investment yield safe returns in the current market?"

Banks Turn Cautious Amid Rising Risks With economic uncertainty, market risks, and lingering non-performing loans (NPLs) weighing down the sector, banks are exercising heightened caution in loan disbursement. Rather than aggressively pushing excess liquidity into risky ventures, financial institutions are prioritizing risk management. Consequently, capital remains stagnant in the system instead of flowing into productive areas.

Economists note that the primary challenge is no longer lowering interest rates, but rather reviving credit demand. To unlock the piled-up funds and stimulate the broader economy, experts emphasize the urgent need for the government to accelerate capital expenditure, unblock stalled infrastructure projects, and ensure clear policy stability.