Nepal’s Banking Paradox: Flush with Cash, but Starved for Borrowers

The Nepali banking sector is currently navigating a perplexing economic paradox: bank vaults are overflowing with deposits, and interest rates have plummeted to new lows, yet the appetite for credit among investors and businesses remains remarkably subdued. Despite an accumulation of loanable funds, the failure to translate this liquidity into credit expansion has posed a severe challenge in channeling accumulated resources into productive sectors. The cost of borrowing has significantly dropped, but business confidence has not recovered enough to keep the money moving.

Recent macroeconomic data published by the Nepal Rastra Bank (up to mid-August 2026) paints a clear picture of this stagnation. Currently, the Credit-to-Deposit (CD) ratio across banks and financial institutions (BFIs) stands at a mere 71.23 percent. In simpler terms, out of every 100 rupees deposited into the banking system, only about 72 rupees are being mobilized as loans. When juxtaposed with the national economy, total BFI deposits have swelled to equal 125.59 percent of the Gross Domestic Product (GDP), whereas total credit disbursement limps behind at just 90.15 percent of the GDP. This widening chasm indicates that trillions of rupees are sitting idle, waiting for investment avenues.

A closer look at the data confirms that a lack of liquidity is entirely out of the equation. By mid-August, the total liquid assets of BFIs stood at an impressive 37.78 percent of their total deposits, with commercial banks alone maintaining a liquidity ratio of 38.69 percent. However, reflective of the sluggish economic activity in the first month of the fiscal year, commercial banks saw their liquid assets drop by approximately Rs 30.93 billion compared to mid-July. This decline underscores that the core issue is no longer a shortage of funds, but rather the stark inability to utilize the existing liquidity.

Faced with a slump in credit demand, banks have historically parked their surplus cash in government securities like treasury bills and development bonds. Yet, in mid-August, total investments by commercial banks also shrank by 1.14 percent to Rs 2.182 trillion. Interestingly, while investments in productive sectors and government securities contracted, BFI investments in shares and other alternative avenues saw a 3.47 percent surge, reaching Rs 559.24 billion. This shift signals a growing tendency among financial institutions to chase secure, short-term yields in the absence of robust corporate borrowing.

While the sluggish credit expansion is a major headache, banks are simultaneously grappling with a sharp deterioration in asset quality. By mid-August, the Non-Performing Loan (NPL) ratio across BFIs climbed to an alarming 5.66 percent. Finance companies took the hardest hit with an NPL of 9.89 percent, followed by development banks at 5.77 percent and commercial banks at 5.56 percent. Consequently, BFIs have been forced to set aside 5.83 percent of their total loan portfolio for provisioning. This rising tide of bad loans has forced banks into a defensive posture, prioritizing aggressive debt recovery and portfolio clean-ups over issuing new credit.

The current scenario has practically defied the traditional economic principle which suggests that cheaper money automatically stimulates borrowing. Over the past year, the weighted average lending rate of commercial banks plummeted from 7.76 percent to 6.48 percent, and the average base rate dropped sharply from 5.78 percent to 4.72 percent. Depositors are also feeling the pinch, with the average deposit rate falling to just 3.15 percent. Despite these highly favorable borrowing conditions, commercial bank credit actually shrank by Rs 7.51 billion in the first month of the fiscal year alone, proving that slashed interest rates are insufficient to spur demand in a hesitant market.

Nepal has made phenomenal strides in financial inclusion. With 53 BFIs operating through 6,343 branches, the system boasts over 63.6 million deposit accounts and upwards of 30.3 million mobile banking users. However, the ultimate challenge lies in leveraging this massive network. The data reveals a stark reality: the pressing economic question has shifted from "Where is the money?" to "Why isn't the money moving?" Until the overall investment climate improves and entrepreneurial morale is restored, cheap credit and overflowing bank vaults alone will not be enough to turn the wheels of the economy.