Nepal's banking system is witnessing a growing surplus of investable funds as credit expansion remains sluggish, prompting Nepal Rastra Bank (NRB) to intensify liquidity management through various monetary instruments. With banks and financial institutions struggling to deploy available funds into productive lending, the central bank has been actively absorbing excess liquidity from the financial system.
In recent months, NRB has prioritized the issuance of one-year central bank bonds alongside short-term deposit collection instruments. So far, the central bank has conducted 15 auctions of one-year bonds, withdrawing nearly Rs. 370 billion from the banking system. During Ashadh alone, NRB issued one-year bonds six times, absorbing around Rs. 170 billion, with demand from banks consistently exceeding the amount offered. The interest rate on these bonds has remained around 2.7%.
Continuing its liquidity management efforts, NRB is set to collect an additional Rs. 60 billion through a 91-day deposit collection instrument on Friday. The move is aimed at reducing excess cash circulating within the banking system, where deposit growth has significantly outpaced loan demand.
According to the latest banking data, total deposits in banks and financial institutions have surpassed Rs. 82 trillion, while total outstanding loans stand at around Rs. 59.36 trillion. As a result, the Credit-to-Deposit (CD) ratio has declined to 71.74%, well below the regulatory ceiling of 90%, indicating substantial unused lending capacity. NRB's latest report attributes the weak credit growth to low private sector confidence, a subdued investment environment, and rising non-performing loans (NPLs). The banking sector's NPL ratio has climbed to 5.6%, with the share of loans classified as being at risk also continuing to increase, reflecting mounting challenges for the country's financial sector.
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