Nepal’s banking sector is currently facing a challenge very different from the liquidity shortages seen in previous years. Instead of competing to attract deposits through higher interest rates, banks and financial institutions are now struggling with excess liquidity and a lack of productive avenues to deploy their funds.

According to the latest data from the central bank, total deposits in Nepal’s banking system have crossed Rs. 80.50 trillion. In comparison, total lending stands at only Rs. 59.13 trillion. As a result, the credit-to-deposit (CD) ratio has dropped to 72.78 percent, well below the regulatory ceiling of 90 percent. This means more than Rs. 13 trillion is currently sitting idle and waiting to be invested.

Remittance Continues to Drive Deposit Growth

The biggest contributor to rising deposits has been remittance inflows. During the first ten months of the current fiscal year, remittance inflow surged by 41 percent to reach Rs. 19.16 trillion. In Baisakh alone, Nepal received more than Rs. 257 billion in remittance.

Since a significant portion of this money is directly deposited into banks, liquidity in the financial system has continued to expand. Bankers also believe that weak momentum in alternative investment sectors such as the stock market and real estate has encouraged households to keep more savings in banks.

Interest Rates Fell, But Credit Demand Did Not Rise

With liquidity increasing, banks gradually reduced both deposit and lending rates. Average deposit rates among commercial banks have declined to around 3.35 percent, while lending rates based on the base rate have fallen to approximately 6.73 percent.

Under normal conditions, cheaper borrowing costs would increase credit demand. However, that pattern has not emerged this time. Private sector credit growth during the first ten months slowed to 5.7 percent, equivalent to around Rs. 312 billion, compared to 7.3 percent during the same period last year.

This suggests that Nepal’s current issue is not a shortage of funds but rather weak borrowing demand.

Excess Funds Are Returning to Nepal Rastra Bank

Unable to find sufficient lending opportunities, banks have increasingly parked their surplus funds back at the central bank.

Currently, nearly Rs. 999 billion from the financial system is being held at Nepal Rastra Bank, where banks are earning returns of only around 2.68 percent to 3 percent.

Bank executives say this is not sustainable because banks must continue paying interest to depositors even when those funds are not generating adequate returns through lending, putting pressure on profitability.

Why Is Credit Demand Weak?

Although Nepal’s external sector remains relatively strong, domestic economic activity has not fully recovered.

Businesses remain cautious about new investments, the construction sector has not regained full momentum, government capital expenditure remains weak, and the real estate market has yet to fully revive.

Sector-wise, lending increased in construction, consumer financing, and transportation and communication sectors, while agricultural lending declined. Meanwhile, trust receipt loans linked to imports recorded sharp growth, indicating that financing is moving more toward consumption and imports rather than productive investment.

The Real Challenge: Creating Investment Opportunities

Economists argue that Nepal’s biggest challenge today is no longer liquidity management but creating investment opportunities.

They suggest mobilizing idle funds through long-term financial instruments such as infrastructure bonds, project-based debentures, municipal bonds, and productive investment channels.

Unless credit demand strengthens and broader economic activity accelerates, the banking system is likely to continue accumulating excess liquidity in the near term.

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