Nepal’s Banks Are Flush With Money, but Credit Is Not Following

Kathmandu — Nepal’s economy presents an unusual contrast. Money is flowing into the country at a rapid pace, foreign exchange reserves are at historic highs and banks are holding abundant liquidity. Yet businesses are not borrowing at anything close to the pace policymakers had expected, investment remains subdued and stress in bank loan portfolios is rising.

The mismatch has emerged as one of the most important challenges facing the economy: Nepal does not appear to have a shortage of financial resources; it has a growing problem converting those resources into productive investment.

The latest Nepal Rastra Bank data underline the scale of the divergence. Deposits at banks and financial institutions reached Rs 8.01 trillion by mid-June 2026, increasing 15 percent year-on-year. Private-sector credit, in contrast, expanded by only 6.5 percent over the same period. During the first 11 months of fiscal year 2025/26, deposits increased by Rs 748.62 billion, while private-sector lending rose by Rs 340.57 billion.

The imbalance remained visible in more recent banking data. As of July 30, deposits stood at about Rs 8.24 trillion while total lending was around Rs 5.92 trillion. The banking system’s credit-to-deposit ratio was only 71.22 percent, leaving considerable room below the regulatory ceiling for additional lending.

The central bank itself has described the situation as a “credit conundrum.” By mid-May, excess reserves in the banking system had reached about Rs 1.1 trillion, while the weighted average lending rate had fallen to around 6.7 percent. Despite cheaper money and abundant liquidity, private-sector credit growth was hovering around 6 percent—only about half the 12 percent expansion projected under the monetary policy for 2025/26.

This matters because lower interest rates would normally be expected to encourage businesses and households to borrow, invest and spend. That transmission mechanism is operating only weakly in Nepal. The problem therefore cannot be explained simply by expensive credit or a shortage of funds.

Remittances are filling banks faster than credit is expanding

The biggest force behind Nepal’s unusually comfortable financial position is the continued surge in money arriving from Nepalis working abroad.

Remittance inflows jumped 38.2 percent to Rs 2.12 trillion in the first 11 months of 2025/26. In US dollar terms, remittances reached $14.59 billion, an increase of 29.6 percent.

Those inflows have helped swell banking deposits, increase money supply and strengthen Nepal’s external accounts. They have also contributed to an extraordinary accumulation of foreign currency reserves.

Gross foreign exchange reserves reached Rs 3.76 trillion, or $24.68 billion, by mid-June. The stock was sufficient to finance an estimated 19.1 months of merchandise and services imports, placing Nepal in an exceptionally comfortable position against an immediate balance-of-payments shock.

The current account recorded a surplus of Rs 802.06 billion and the balance of payments a surplus of Rs 926.06 billion during the first 11 months. In other words, Nepal’s immediate external problem is not a shortage of foreign currency.

But the strength of those indicators can conceal a weaker domestic story.

The central bank says recent growth in broad money has increasingly been driven by foreign assets, supported by remittance inflows, while sluggish credit has contributed to a decline in net domestic assets. This means a growing share of monetary expansion is being generated externally rather than by stronger domestic investment and credit creation.

That distinction is crucial. A country can accumulate reserves and bank deposits while still struggling to generate factories, businesses, exports and employment.

Calling the money ‘idle’ is only partly correct

It would be misleading, however, to say that Rs 8 trillion sitting in bank accounts is literally idle. Banks do not simply store deposits in vaults; they hold loans, securities, reserves and other financial assets against those liabilities.

The real concern is under-utilised lending capacity.

NRB estimated that commercial banks alone still had the capacity to provide more than Rs 600 billion in additional loans as of mid-May, after taking into account capital, liquidity and credit-to-deposit constraints. Yet credit demand and actual disbursement remained subdued.

The deposit structure itself has also shifted significantly. Savings deposits accounted for 46.6 percent of deposits by mid-June, up sharply from 36.2 percent a year earlier, while the share of fixed deposits dropped from 50.2 percent to 37.3 percent.

The numbers therefore point less to a shortage of loanable funds and more to a failure to transform available financial resources into investment at sufficient scale.

Banks have a reason to be cautious

Weak lending cannot be blamed entirely on banks. Their willingness to assume additional risk has been damaged by deteriorating loan quality.

Gross non-performing loans across banks and financial institutions reached about 5.6 percent by mid-April 2026, according to NRB. More concerning is the rise in loans on the watchlist—from 6.7 percent in mid-July 2023 to 11.1 percent by mid-April 2026. These are loans that have not necessarily become non-performing but show signs of increased repayment stress.

The central bank’s longer-term analysis is equally revealing. The NPL ratio of commercial banks rose from 1.81 percent in 2016 to 5.41 percent in 2026, while weakening asset quality has forced banks to increase provisions and has put pressure on profits and capital adequacy.

The previous fiscal year had already shown deterioration. NPLs at banks and financial institutions increased from Rs 199.66 billion in mid-July 2024 to Rs 258.19 billion in mid-July 2025, with 62.3 percent of bad loans classified in the loss category.

This creates a feedback loop. Weak economic activity makes it harder for existing borrowers to repay. Rising defaults force banks to provision more capital against bad loans. That reduces their ability and willingness to lend. Less lending then makes it harder for businesses to recover and expand.

Simply ordering banks to lend more would therefore be a poor solution. Forcing aggressive credit growth while asset quality is already deteriorating could create another wave of bad loans rather than sustainable economic growth.

Nepal’s dependence on property remains a structural weakness

The structure of lending also reveals why credit transmission remains difficult.

As of mid-June, 63.6 percent of outstanding BFI credit was secured against land and buildings. NRB has acknowledged that heavy dependence on property collateral has become intertwined with both bank lending and Nepal’s real-estate cycle.

The central bank says roughly three-fifths of loans were secured by land and buildings as of mid-May. When property prices rose, collateral values supported rapid credit expansion. But the subsequent stagnation and correction in real estate have made collateral harder to sell and bad loans more difficult to recover.

This exposes a fundamental weakness in Nepal’s banking model. A potentially productive enterprise with strong future cash flow but little property may find financing difficult, while a borrower owning expensive land can have easier access to credit.

NRB has consequently signalled a gradual shift toward project-based and character-based lending, supported by individual credit scoring, rather than relying overwhelmingly on land as collateral.

Such a transition could prove more important for productive investment than simply lowering interest rates further.

Strong remittances are also financing a large import economy

Nepal’s remittance strength must also be viewed alongside its trade structure.

Imports climbed 15.2 percent to Rs 1.89 trillion during the first 11 months of the fiscal year, while exports amounted to only Rs 277.97 billion. As a result, the merchandise trade deficit widened 15.7 percent to Rs 1.62 trillion.

The export-import ratio slipped to 14.7 percent, meaning Nepal continues to export only a small fraction of what it imports.

Remittances are therefore performing two functions simultaneously. They strengthen household income and foreign currency reserves, but they also provide the foreign exchange that allows an import-dependent economy to sustain a very large trade deficit.

That does not prove that most remittance money is being directly spent on consumption or property—the available macroeconomic data do not establish that claim by themselves. But it does show that the economy has not yet converted rising external income into a comparable expansion of domestic export capacity.

NRB itself has cautioned that recent export growth is not yet broad-based. It found that the improvement was driven heavily by specific products, particularly soybean oil, rather than a general strengthening of Nepal’s export competitiveness.

Government investment is not filling the gap either

The weakness is not confined to private investment.

Federal capital expenditure stood at only Rs 132.67 billion during the first 11 months of 2025/26, down 7.5 percent from the same period a year earlier. At the same time, government cash balances held at NRB had climbed to Rs 418.54 billion by mid-June, compared with Rs 137.78 billion at the start of the fiscal year.

The combination is economically significant. When private credit is weak and public capital spending is also sluggish, abundant liquidity has fewer channels through which it can translate into new infrastructure, industrial capacity and employment.

That is why the current situation should not be viewed solely as a banking problem.

The real risk is prolonged stagnation, not an immediate financial collapse

Nepal’s present condition should also not be exaggerated into an imminent economic crisis.

The banking system remains liquid, foreign exchange reserves are exceptionally strong and the external account is in surplus. These are genuine buffers.

The more plausible danger is a prolonged period of weak domestic investment in which remittances keep deposits and reserves high but credit, productivity and job creation fail to accelerate.

Such an environment could keep lending rates low for an extended period, squeeze banks’ interest margins and make it harder for financial institutions to grow earnings through normal credit expansion. Meanwhile, businesses may postpone investment because of weak demand, political uncertainty, regulatory risk or doubts about future returns.

The central bank’s July macroeconomic assessment points precisely to this combination: abundant liquidity on the supply side, but private-sector resistance, stricter lending standards and declining asset quality constraining credit expansion.

The solution is not simply ‘more loans’

The policy challenge is therefore more complicated than pushing banks to disburse money.

Nepal needs better credit, not merely more credit.

That means expanding cash-flow and project-based lending, strengthening credit information systems, improving insolvency and loan-recovery mechanisms, reducing excessive dependence on property collateral and creating credible projects capable of absorbing long-term finance.

Government policy is equally important. Predictable taxation and regulation, faster approvals, stronger contract enforcement and better execution of capital expenditure can influence investment demand more directly than another small reduction in bank interest rates.

Credit guarantees can help viable small and medium enterprises that lack collateral, but poorly designed guarantees would merely transfer bad-loan risk from banks to taxpayers. Any such programme therefore needs strict eligibility, risk sharing and monitoring.

Remittance-linked investment products and diaspora financing instruments may also widen the channels through which foreign earnings enter productive activities. But issuing a “diaspora bond” alone will accomplish little unless the projects financed by it are credible, transparent and able to generate economic returns.

The central lesson from the present data is consequently different from saying Nepal simply has “too much idle money.”

Nepal has achieved considerable financial and external stability, powered heavily by remittances. But the domestic machinery that should convert that financial strength into investment, production and employment is operating inefficiently.

The country’s economic vulnerability lies in that gap.

If credit quality improves, viable investment opportunities expand and government capital spending becomes more effective, today’s surplus liquidity could become a major source of growth. If those structural constraints persist, however, Nepal could continue accumulating deposits and foreign exchange reserves while businesses invest cautiously, banks struggle with stressed loans and workers continue searching abroad for opportunities that the domestic economy has failed to create.