Kathmandu: The average base interest rate of Nepal’s commercial banks has fallen below five percent for the first time, reflecting persistent excess liquidity in the banking system and weak demand for private sector credit despite record deposit growth.
According to data from Nepal’s 20 commercial banks, the average base rate declined to 4.97 percent in the final month of the current fiscal year 2025/26. The base rate serves as the benchmark for lending rates, with banks adding a risk-based premium depending on the borrower’s credit profile. The latest decline is expected to translate into cheaper borrowing costs for businesses and individuals.
Among the commercial banks, nine reported base rates below five percent. Standard Chartered Bank Nepal recorded the lowest base rate at 4.21 percent, while NIC Asia Bank posted the highest at 6.04 percent, making it the only commercial bank with a base rate exceeding six percent.
The sharp fall in interest rates comes as banks continue to accumulate deposits faster than they can extend loans. During the first 11 months of the fiscal year, commercial banks collected deposits totaling more than Rs 7.254 trillion, an increase of Rs 723 billion from the beginning of the fiscal year. However, lending expanded by only Rs 289 billion, with total outstanding loans reaching Rs 5.263 trillion.
The imbalance between deposit growth and credit expansion has significantly increased excess liquidity in the banking system. Based on the Nepal Rastra Bank’s regulatory ceiling of a 90 percent credit-deposit (CD) ratio, commercial banks are estimated to be holding nearly Rs 1.3 trillion in idle loanable funds.
Banking data further show that the average CD ratio has fallen to 72.42 percent, down from 76.18 percent at the beginning of the fiscal year, while some banks have reported ratios as low as 50 percent. The declining ratio indicates that a growing share of deposits remains unutilized due to sluggish investment and borrowing demand.
Despite historically low interest rates, credit growth has remained subdued as businesses continue to delay expansion plans amid weak economic activity and cautious investor sentiment. Economists note that lower lending rates alone may not be sufficient to revive credit demand unless overall business confidence, investment opportunities, and economic growth improve.
The continued decline in base rates highlights the broader challenges facing Nepal’s financial sector, where abundant liquidity contrasts sharply with limited productive investment. Analysts say the upcoming monetary policy will be crucial in determining whether additional policy measures can stimulate lending, boost private sector investment, and support broader economic recovery.
