Money without mobilisation: the paradox behind Nepal's banking glut

KATHMANDU — Nepal's banks are wrestling with an unusual kind of problem: too much money. Even as deposits pile up, lenders are struggling to put that money to work, and the gap between what they take in and what they lend out keeps widening. The latest figures describe a system that is not short of cash but short of places to deploy it — a reversal of the scarcity that defined the sector only a few years ago.

The scale of the mismatch is stark. Over the past 11 months, commercial banks gathered an additional Rs 723 billion in deposits but extended just Rs 289 billion in fresh credit, according to the Nepal Bankers' Association (NBA). Deposits, in other words, grew more than two and a half times faster than lending — a divergence that, sustained over months, signals something deeper than a seasonal lull.

The longer trend tells the same story. Commercial bank deposits, which stood at Rs 6.53 trillion at the close of the last fiscal year, had climbed to Rs 7.25 trillion by mid-June this year. Lending rose far more modestly over the same stretch, from Rs 4.97 trillion to Rs 5.26 trillion. The pattern held even within a single month: in Jeth alone, deposits swelled by Rs 65.45 billion while credit grew by only Rs 31.81 billion — again, roughly two to one.

Nowhere is the build-up clearer than in the credit-to-deposit (CD) ratio, which fell 3.77 percentage points to 72.42 percent in mid-June, down from 76.18 percent at the end of the previous year. Regulators allow banks to lend up to around 90 percent of their deposits, yet most are sitting well below that ceiling, and some near 50 percent. By industry estimates, lenders are holding more than Rs 1.3 trillion that is available to be loaned out but is not. That idle, or 'passive', liquidity is the symptom; the cause lies elsewhere.

The puzzle is that cheaper money has not revived borrowing. Interest rates have fallen, but investment has not picked up — a disconnect NBA chief executive Anil Sharma describes as a genuine concern for the economy. "No one really has an easy answer to why investment hasn't risen even as rates have come down," he said. He is careful to locate the problem outside the banks: lenders are not the obstacle, he argues, nor is regulation, which the central bank has eased. The demand for loans has simply dropped. The implication matters — when borrowing stays flat despite falling rates, the binding constraint is not the cost of money but confidence and demand, which monetary easing alone cannot manufacture.

Part of the deposit surge has an external source. Remittances continue to flow in strongly, swelling bank balances even as domestic demand softens; Sharma notes deposits are growing at about 12 percent against credit growth of roughly 6 to 7 percent. The result is a structural mismatch that has long shadowed the Nepali economy — money arriving from abroad faster than the domestic economy can absorb it productively. A strong external sector, put plainly, is masking a weak internal one.

For the banks themselves, the glut is not the comfortable position it might appear. Deposits carry an interest cost, and money that cannot be lent earns little to offset it. "We have to pay interest to depositors, but there is nowhere to invest," said the chief executive of one commercial bank, calling the situation an uneasy one for the business. Compounding matters, around 10 banks are operating close to their regulatory capital limits and are wary of expanding credit even where demand exists. Beneath the surface of 'ample liquidity', then, sits a sector under pressure on both earnings and capital — strained further by rising bad loans and a growing pile of non-banking assets.

The contrast with the recent past is sharp. Only a few years ago, banks competed fiercely for deposits, pushing up interest rates to lure savers and funding their lending with expensive money they could barely source. That world has turned upside down. The shortage today is not of money but of avenues to mobilise it — a problem of deployment rather than supply.

The roots of weak demand run through the real economy. Industrialists and businesses remain cautious about fresh investment; construction has yet to regain momentum; government capital spending is weak; real estate has not fully revived; and sentiment in the share market remains unsteady. A Nepal Rastra Bank official points to a thin pipeline of new industries and little appetite among existing firms for capacity expansion, alongside working-capital loan guidelines, credit-utilisation checks and the property- and equity-market slowdown, as factors damping loan demand. The sluggishness is broad-based — and credit weakness is as much its consequence as its cause.

For all that, the picture is not one of collapse. Sharma cautions against calling credit expansion stalled: growth of 6 to 7 percent is broadly where it has sat for two years, he notes, and is "not disappointing", even if it falls short of the central bank's 12 to 12.5 percent target. Demand is weak, on this reading, but not absent — the system is functioning, just below its potential rather than seizing up.

With the strain expected to persist, bankers are looking to the next monetary policy for relief. The NBA has submitted a set of recommendations to Nepal Rastra Bank for fiscal year 2083/84, framed around the slowdown, the excess liquidity sloshing through the system, rising non-performing loans and the weight of non-banking assets. Among them: a properly organised secondary market for government securities, so banks can convert bond holdings to cash when needed; an amendment to the Banks and Financial Institutions Act (BAFIA) to let lenders lease or rent out repossessed property they currently struggle to sell; the inclusion of health and education among the central bank's priority sectors; the adoption of risk-based pricing, under which rates would reflect a borrower's risk; and leaving service-fee ceilings to open-market competition.

Tellingly, most of these measures address the symptoms rather than the source. A secondary bond market and easier rules on non-banking assets would help banks manage the glut and clean up strained balance sheets, while risk-based pricing would refine how credit is priced. None, however, directly revives the demand for loans, which originates outside the financial system altogether. It is a familiar bind — bankers asking for better tools to manage a problem whose cure lies largely beyond their reach.

That is the deeper message in the data. Nepal's banks have more than enough money to lend; what they lack is borrowers confident enough to take it. Lower rates and surplus liquidity have set the stage for a credit recovery, but the cast — investors, builders, manufacturers — has yet to arrive. Until domestic confidence and economic activity revive, the system is likely to remain caught in its present paradox: rich in deposits, poor in demand, and waiting on the real economy to turn.