The financial indicators of the first ten months of fiscal year 2025/26 (2082/83 BS) present a striking contradiction in Nepal’s banking sector. While deposits are growing at a healthy pace, credit expansion remains sluggish, highlighting that the country’s challenge is no longer a shortage of money but a lack of business confidence and investment demand.
According to Nepal Rastra Bank, deposits in banks and financial institutions increased by 7.3% during the review period, reaching NPR 6,922 billion. Strong remittance inflows, a comfortable foreign exchange reserve position, and steady household savings have continued to boost liquidity across the banking system.
However, private sector lending grew by only 4.9%, far below the central bank’s annual target of 11.5%. This significant gap suggests that businesses and individuals remain hesitant to borrow and invest despite favorable financing conditions.
One of the defining features of the current fiscal year has been excess liquidity in the banking system. As loan demand weakened, the average Credit-to-Deposit (CD) ratio dropped to around 73%, well below the regulatory ceiling of 90%. This means banks have substantial funds available for lending but are struggling to find qualified borrowers and viable investment opportunities.
Industry estimates suggest that more than NPR 600 billion in investable funds is currently sitting idle within the banking system. To manage this surplus liquidity, Nepal Rastra Bank has repeatedly absorbed excess funds through deposit collection instruments and monetary operations.
The abundance of liquidity has pushed interest rates to multi-year lows. Banks’ base rates have fallen into single digits, while the weighted average lending rate has declined from around 10.48% to approximately 8.5%. Under normal economic conditions, lower borrowing costs would stimulate demand for loans and encourage investment. However, Nepal’s current economic environment tells a different story.
Despite cheaper credit, businesses remain cautious due to weak domestic demand, slow industrial activity, limited expansion opportunities, and uncertainty surrounding future economic growth. As a result, low interest rates alone have not been sufficient to revive lending activity.
Another major challenge facing the banking sector is the rise in non-performing loans (NPLs). Economic slowdown, stress in the cooperative sector, and weakened repayment capacity among borrowers have contributed to a significant increase in bad loans. NPL levels, which traditionally hovered around 1–2%, have now risen above 4%, reaching a level that many analysts consider concerning.
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