Nepal’s Banks Sit on Surplus Liquidity Amid Sluggish Lending, Despite Government Optimism

Despite the government’s assertion of improved economic momentum, banks and financial institutions (BFIs) in Nepal continue to struggle with surplus liquidity, opting to deposit idle funds at the Nepal Rastra Bank (NRB) rather than directing them toward productive investments.

According to NRB data, on a single day (Wednesday), BFIs parked Rs 31.85 billion in excess funds under various central bank liquidity facilities. Altogether, Rs 368.65 billion is currently held by BFIs at the NRB, including:

• Rs 111.80 billion via the Standing Deposit Facility, and
• Rs 256.85 billion through money market instruments like competitive bidding.

This growing deposit imbalance is stark:

• Total deposits with BFIs have reached Rs 6.954 trillion, but
• Total lending is limited to Rs 5.54 trillion, with commercial banks contributing Rs 4.930 trillion.
• The credit-to-deposit ratio is just 78.64%, well below the 90% regulatory ceiling, highlighting a Rs 710 billion surplus in loanable funds.

Why Aren’t Banks Lending?

Bankers and analysts point to several reasons:

1. Muted Economic Activity: Investment appetite remains weak, discouraging borrowing even as liquidity improves.
2. Stricter Lending Practices: BFIs are tightening credit screening following IMF-backed scrutiny of collateral quality, leading to more conservative lending.
3. Regulatory Pressures: The need to maintain a healthy capital adequacy ratio (CAR) has made banks more risk-averse.
4. Low Returns: Weak returns from investment opportunities are deterring potential borrowers.
5. Rising Remittances: High inflows of remittance have bloated deposits, exacerbating the liquidity pile-up.

Lending Falls Short of NRB Target

For FY 2024/25, NRB aimed for 12.5% growth in private sector lending. As of mid-April, growth stood at only 7.1%, missing the target by more than 5 percentage points.

In summary, while Nepal’s financial system is flush with liquidity, demand-side weaknesses and policy constraints continue to stall credit growth—posing a challenge for both economic revival and monetary transmission.