Liquidity Improves as Banks Prioritize Loan Recovery Over Disbursement Amid Sluggish Economy

As the Nepali fiscal year approaches its close in Asar (mid-June to mid-July), banks and financial institutions in Nepal have shifted their focus more towards loan recovery than fresh loan disbursement. This strategic adjustment is starting to ease the liquidity crunch that the banking sector has grappled with in recent months.

According to data published by Nepal Rastra Bank (NRB), the average credit-to-deposit (CD) ratio of the banking sector has dropped to 78.05% as of last Thursday, reflecting a 0.08 percentage point decrease from the previous day. This downward trend in CD ratio indicates growing investable liquidity within the banking system.

The CD ratio is a key regulatory and financial metric that measures how much of the deposits collected by banks have been disbursed as loans. In Nepal, regulatory norms allow banks to maintain this ratio up to 90%, meaning they can lend 90 paisa for every rupee they collect in deposits. However, banks are currently operating well below this limit.

1. Capital Adequacy Pressure: Banks are wary of breaching capital adequacy thresholds, especially under Basel III regulations.

2. Economic Slowdown: The broader economic environment remains sluggish. Investment appetite among businesses and individuals has not picked up significantly, leading to reduced demand for loans.

A sharp contrast is evident in deposit growth versus credit growth. On Thursday alone, bank deposits increased by NPR 8 billion, rising from NPR 7.035 trillion to NPR 7.043 trillion. Meanwhile, credit growth remained muted, increasing by just NPR 1 billion, from NPR 5.574 trillion to NPR 5.575 trillion.

This widening gap suggests that while public confidence in banks remains high (as indicated by strong deposit inflows), economic agents are still hesitant to borrow—possibly due to high interest rates, policy uncertainty, or weak market demand.

As per the data from commercial banks, they have collectively collected NPR 6.303 trillion in deposits by Thursday, and disbursed NPR 4.955 trillion in loans. This positions the CD ratio for commercial banks well below the regulatory threshold, further reinforcing the observation that banks are cautious in expanding credit.

Improved liquidity is generally seen as a positive development—it means banks have more funds to lend, interest rates may gradually come down, and financial stress in the sector is easing. However, unless there’s a corresponding pick-up in credit demand, this surplus liquidity may not translate into economic expansion.

This scenario calls for policy-level interventions to boost market confidence, accelerate public and private sector investment, and stimulate productive sectors of the economy. Otherwise, the current trend may lead to idle liquidity and missed opportunities for growth.