The Liquidity Paradox: State-Owned Banks Sit on Idle Cash as Private Sector Credit Appetite Shrinks

Nepal’s commercial banking sector is currently navigating a massive liquidity surplus, characterized by a staggering accumulation of deposits that severely outpaces credit disbursement. By mid-October, the collective deposit base of the country's 20 commercial banks swelled to Rs 7.74 trillion, while total lending lagged significantly at Rs 5.43 trillion. This glaring disparity has dragged the industry’s average Credit-to-Deposit (CD) ratio down to a sluggish 70.25%, exposing a deeply cautious lending environment driven by economic uncertainty.

The data reveals a sharply polarized banking landscape, with state-owned institutions acting as the primary anchors pulling the national credit average downward. Rastriya Banijya Bank (RBB) exemplifies this extreme risk aversion. Despite holding the industry's largest deposit pool at Rs 716.93 billion, RBB has only mobilized Rs 349.44 billion in loans, resulting in an abnormally low CD ratio of 48.89%. Its state-backed peers mirror this defensive posture, with Nepal Bank and the Agricultural Development Bank (ADBL) restricting their CD ratios to 62.16% and 67.56%, respectively. Together, these institutions are sitting on vast reserves of unutilized capital rather than channeling it into the national economy.

Conversely, a segment of private sector banks continues to push the envelope, actively seeking lending opportunities despite a depressed market. Prime Commercial Bank has emerged as the most aggressive lender, operating at a CD ratio of 86.41% by deploying Rs 250.90 billion against a deposit base of Rs 279.48 billion. NMB Bank (84.71%) and Nabil Bank (80.01%) are also maintaining high-velocity credit flows. Meanwhile, Global IME Bank stands out for its sheer volume; while maintaining a balanced CD ratio of 70.11%, it has successfully disbursed a market-leading Rs 507.81 billion in loans.

However, not all private and foreign entities share this aggressive strategy. Standard Chartered Bank, a foreign joint-venture, remains the most conservative player in the entire financial system, operating with a highly contracted CD ratio of just 46.24%. Other major private institutions, including NIC Asia (61.09%), Nepal SBI (64.54%), Prabhu (65.07%), and Nepal Investment Mega Bank (66.73%), have also opted to pump the brakes on credit expansion, falling well below the 70% threshold.

Financial experts suggest this systemic stagnation is a dual symptom of institutional caution and a paralyzed macroeconomic environment. Former banker Parshuram Kunwar Chhetri notes that this low credit mobilization is driven heavily by a genuine slump in market demand, coupled with banks adopting stringent risk-management protocols to avoid non-performing loans. Chhetri points out that from a purely operational standpoint, a low CD ratio is not necessarily a crisis for banks; institutions backed by a high volume of low-cost current accounts can easily absorb the impact without facing significant cost-of-fund pressures. Nonetheless, for the broader economy, these idle funds signal a critical lack of business confidence that must be addressed to stimulate economic recovery.