Over Rs. 820 Billion Remains Idle in Banks; Nepal Rastra Bank Continues Aggressive Liquidity Absorption

Kathmandu — Nepal’s banking and financial system continues to grapple with excessive liquidity as more than Rs. 820 billion remains idle in banks, unable to be invested. According to Nepal Rastra Bank (NRB), this huge volume of surplus funds has accumulated mainly due to weak credit demand, even as remittance inflows reach record highs. Banks have been depositing these idle funds in the central bank through the Deposit Collection Instruments and the Standing Deposit Facility (SDF).

Remittance inflows have surged in recent months, causing deposits to rise sharply. However, the pace of credit expansion has remained slow across the banking sector. Despite continuously declining interest rates, private-sector credit demand has not picked up. As a result, the banking system is flooded with investable funds that banks cannot deploy into loans.

Credit Growth Stagnant, Liquidity Pile-Up Deepening

NRB data shows that by the end of the first quarter of the current fiscal year, the banking system had accumulated more than Rs. 1.1 trillion in surplus lending capacity. For nearly two and a half years, banks have been stuck in a cycle of slow credit disbursement despite abundant liquidity. The trend highlights structural weaknesses in the broader economic environment, where businesses, industries, and consumers have been unable or unwilling to take on new loans.

Due to a lack of productive sectors absorbing credit, commercial banks have been forced to keep a large share of their collected deposits parked in the central bank, contributing to liquidity saturation across the financial system.

Rs. 820.25 Billion Parked in NRB

As of this week, banks have placed Rs. 820.25 billion in NRB under different liquidity-absorption instruments:
– Rs. 306.40 billion in Deposit Collection Instruments
– Rs. 513.85 billion in the Standing Deposit Facility (SDF)

Much of this amount is set to mature on Wednesday. By Mangsir 3, banks had invested all surplus funds into short-term NRB instruments, as they could not lend these funds into the economy.

NRB to Absorb Another Rs. 50 Billion for 84 Days

With liquidity pressure showing no signs of easing, NRB has announced it will once again absorb Rs. 50 billion from the financial system on Monday through an 84-day Deposit Collection Instrument. Just last Sunday, NRB had issued a similar instrument worth Rs. 50 billion. Nineteen banks and financial institutions had submitted bids totaling Rs. 72.50 billion, but NRB accepted only the targeted amount. The average interest rate on that instrument settled at 2.99 percent.

In the month of Kartik alone, NRB issued such instruments eight times. This is the first issuance of Mangsir. Banks and financial institutions may apply for Monday’s issuance through competitive bidding until 2 PM. The settlement date for principal and interest has been fixed for Magh 28.

Use of Long-Term Instruments Indicates Continued Liquidity Pressure

Previously, NRB used shorter-duration instruments of 7, 17, and 21 days to manage liquidity. But over the last year, the central bank has increasingly relied on longer-term tools of 84 and 175 days. Analysts interpret this shift as a signal that liquidity oversupply will persist for some time.

According to economists, the real problem is not liquidity but weak credit demand. “Until economic activities revive and businesses expand, banks will not be able to deploy their funds effectively,” an economist told Kantipur. “The liquidity problem is a symptom — the root issue is a stagnant economy.”

Deposits at Rs. 7.52 Trillion; Credit at Rs. 5.64 Trillion

NRB reports that the banking system currently holds Rs. 7.52 trillion in deposits. Of this:
– Commercial banks hold Rs. 6.747 trillion
– Other financial institutions hold Rs. 755 billion

Total credit disbursed stands at Rs. 5.639 trillion, with commercial banks accounting for Rs. 5.017 trillion, and development/finance institutions providing Rs. 622 billion.

CD Ratio at 74.31% — Banks Still Have Over Rs. 1.1 Trillion to Lend

The average Credit-to-Deposit (CD) ratio across banks stands at 74.31 percent, well below the 90 percent regulatory threshold. This indicates that banks still have Rs. 1.112 trillion in deployable funds. However, the continuous absence of demand means that this amount remains locked within NRB’s liquidity-absorption instruments.

Weak Economic Activity at the Core of the Problem

Experts emphasize that the cycle is unlikely to break until market demand improves. With consumption weak, businesses cautious, and investment sentiment low, banks remain unable to expand their lending portfolios.

“Remittances have inflated deposits, but without economic vibrancy, credit off-take cannot grow,” analysts say. “As long as this mismatch persists, the liquidity surplus will continue to deepen.”