As the current fiscal year nears its end, Nepal Rastra Bank (NRB) has rolled out an ambitious monetary policy for 2025/26, targeting a 12 percent growth in private sector lending—even as the banking system continues to grapple with excessive liquidity and sluggish credit demand.
The new policy, unveiled on Friday, sets a lending target nearly identical to the current year’s 12.5 percent, though actual credit growth has barely surpassed 8 percent so far. Despite ample funds, banks and financial institutions (BFIs) have struggled to find credible borrowers amid weak economic activity and rising risks of loan defaults.
Over the past 11 months alone, NRB absorbed Rs 21.340 trillion in excess liquidity from the market—a staggering rise compared to just Rs 3.838 trillion in the same period last year. Of this, Rs 2.784 trillion was mopped up through bidding, while Rs 18.558 trillion was parked under the Standing Deposit Facility (SDF), a short-term instrument aimed at preventing surplus cash from distorting monetary stability.
Despite interest rates falling to a three-year low, lending momentum has remained sluggish. Bankers cite multiple barriers: subdued business sentiment, increasing non-performing loans, and cautious lending due to tighter regulatory scrutiny.
“The central bank’s strategy to lower interest rates is not enough on its own,” said one senior banker. “Without restoring investor confidence and improving economic performance, demand for credit won’t rise meaningfully.”
Under the revised monetary policy, the bank rate has been reduced to 6 percent (from 6.5 percent), while the deposit facility rate has been cut to 2.75 percent. The policy rate, a key benchmark for liquidity operations, now stands at 4.5 percent, down from 5 percent. Meanwhile, the money supply growth target has been capped at 13 percent.
Former NRB Executive Director Prakash Kumar Shrestha commented that the current economic climate may render such expansionary measures ineffective. “We are likely entering a liquidity trap, where lowering rates fails to stimulate borrowing or spending,” Shrestha said.
As Nepal’s financial sector enters a new fiscal cycle, the effectiveness of the central bank’s monetary tools will depend not just on the numbers—but on how well policy can revive private sector confidence and reignite real economic activity.
