Banks and financial institutions (BFIs) in Nepal deposited more than Rs 14.1 trillion at Nepal Rastra Bank (NRB) in the first six months of the current fiscal year as they grappled with excess liquidity due to a sharp decline in loan demand.
According to NRB records, the central bank absorbed Rs 1.486 trillion through a bidding process, collecting deposits from BFIs. Additionally, Rs 12.514 trillion was received under the Standing Deposit Facility (SDF) between mid-July and mid-January of FY 2024/25.
NRB spokesperson Ramu Paudel stated that the central bank took these measures to manage surplus liquidity in the banking sector. He also mentioned that NRB, in collaboration with the Ministry of Finance, is planning to introduce a new mechanism to address excess liquidity in the country’s banking system.
During the review period, loanable funds with BFIs more than doubled. As of Monday, BFIs’ total lending stood at Rs 5.425 trillion, with a credit-deposit ratio of 79.41 percent.
To regulate interest rates, the central bank accepts deposits through auctions when financial sector interest rates are low. The SDF system, introduced last fiscal year, allows BFIs to deposit excess liquidity at the NRB while earning a three percent interest rate.
However, NRB data indicate a slowdown in liquidity absorption in the second quarter of the current fiscal year. Between mid-October 2024 and mid-January 2025, the central bank collected Rs 1.270 trillion from the banking system.
Former NRB Governor Dipendra Bahadur Chhetri cautioned that the central bank’s approach to absorbing excess liquidity could negatively impact economic activity. He emphasized that instead of depositing funds at NRB, BFIs should prioritize investments in small projects.
In addition to surplus liquidity, BFIs are also struggling with increasing non-banking assets due to a rise in bad debts. NRB reports that BFIs’ non-banking assets reached Rs 38.26 billion, reflecting a 1.7 percent increase in the review period.
Non-banking assets include fixed properties held as loan collateral, which are auctioned by banks when loans turn into bad debts. The growing volume of non-banking assets signals rising risks in asset management and increasing provisioning against bad debts.
