Rs 8 Trillion in the Vault, Few Takers at the Counter: Deposit Milestone Masks a Credit Drought

Total deposits in Nepal's banking system have crossed the Rs 8 trillion mark — Rs 8,014 billion as of Jestha 14, according to the latest Nepal Rastra Bank data. It is a milestone that tells two stories at once: never has the system held so much money, and rarely has it struggled this hard to find borrowers for it.

The engine behind the pile-up is remittance. In the first nine months of the current fiscal year 2082/83, Nepal received Rs 1,659 billion from workers abroad — a striking 39 percent jump over the same period last year. With alternative investment avenues limited, that money has flowed straight into bank accounts, swelling deposits even though the average deposit rate has sunk to a meager 3.40 percent. When savers accept near-nothing returns and still keep depositing, it says less about the attractiveness of banks than about the absence of anywhere else for the money to go.

The lending side tells the opposite story. Banks have extended Rs 5,898 billion in credit, leaving the credit-to-deposit (CD) ratio at just 72.93 percent. The average lending rate has slid to 6.77 percent — among the lowest in years — yet private sector demand for loans has barely stirred. Cheap money, it turns out, cannot manufacture borrowers.

The headroom this leaves is enormous. Banking sector insiders put the funds currently available for lending at over Rs 1,300 billion — a figure that checks out against the arithmetic: with the CD ratio at 72.93 percent against the regulatory ceiling of 90 percent, roughly 17 percentage points of lending capacity sits unused. That is a war chest large enough to finance a small construction boom, lying effectively idle because industry, trade, construction and other productive sectors are not asking for it.

Unable to lend, banks are parking the surplus with the central bank. More than Rs 1,000 billion now sits at Nepal Rastra Bank, absorbed through its deposit collection instruments and the standing deposit facility (SDF) at interest rates of 2.68 to 3 percent. The central bank's mechanism works both ways — mopping up money when the system is flush and injecting it back when liquidity tightens — and for now it is working overtime in only one direction.

Look closely at those numbers and the squeeze on banks becomes visible. They are paying depositors an average of 3.40 percent while earning no more than 3 percent on funds parked at the central bank — a negative carry on every idle rupee. That structural loss-maker explains why lending rates keep being cut: with the spread between deposit and lending rates compressed to a thin 3.37 percentage points, banks are not being generous, they are being desperate. The longer the credit drought lasts, the harder their profitability gets hit — a pressure point the central bank's own recent analysis of the financial sector has flagged, noting precisely this combination of abundant liquidity and weak loan demand.

The deeper paradox is what the remittance surge is — and is not — doing. Record inflows are lifting household incomes, propping up foreign exchange reserves and filling bank vaults, but they are arriving as savings, not as investment. An economy that earns abroad and parks at home will keep generating deposit milestones without generating the factories, projects and jobs that would borrow against them. And history offers a caution: when returns on deposits stay this low for this long, idle money tends to seek out shares and real estate rather than productive enterprise.

For policymakers, the message in the data is uncomfortable but clear. Interest rates have done about all they can; the binding constraint is no longer the price of money but the confidence to use it. Economists say credit expansion will struggle to accelerate until private investment appetite returns, business confidence recovers, the construction sector revives and overall economic activity picks up — which shifts the burden squarely onto fiscal execution and structural reform rather than further monetary easing.

Until that turn comes, the pattern looks set to persist: deposits climbing, loans crawling, and the central bank vacuuming up the difference. Rs 8 trillion is a number that flatters the system. Money waiting, after all, is not money working.