Nepal’s commercial banks are facing a growing liquidity surplus, pushing their credit-to-deposit (CD) ratio to a record low of 62.59 percent, well below the Nepal Rastra Bank’s (NRB) regulatory threshold of 90 percent. This indicates a sluggish lending environment, with banks unable to channel their deposits into productive loans.
As per NRB regulations, banks and financial institutions (BFIs) can lend up to 90 percent of their deposits. However, for the past two years, banks have been operating far below this limit due to weakened loan demand. The Nepal Bankers’ Association reveals that Rastriya Banijya Bank, a state-owned institution, recorded the lowest CD ratio of 62.59 percent as of the end of fiscal year 2024/25.
Out of the country’s 20 commercial banks:
- 3 banks have CD ratios below 70 percent
- 11 banks fall between 70 and 80 percent
- Only 6 banks exceed 80 percent
The average CD ratio of all commercial banks stood at 75.78 percent by mid-July 2025, a drop from 78.89 percent in mid-July 2024.
A major factor contributing to this low CD ratio is the excessive liquidity in the banking system. As of the start of the current fiscal year, BFIs had deposited Rs 306 billion in the central bank using its standing deposit facility, part of a total Rs 700 billion in unutilized funds. These deposits reflect the banks’ inability to find viable lending opportunities in a sluggish economy.
Recent NRB data further highlights the imbalance: total bank deposits reached Rs 7.292 trillion, whereas total loans stood at only Rs 5.600 trillion. The gap of Rs 1.692 trillion underscores the challenge banks face in converting deposits into income-generating loans.
Adding to the complexity, BFIs are facing rising loan defaults, increasing volumes of non-banking assets, and stagnated lending growth. These issues have made banks more cautious, limiting their willingness to extend credit.
Meanwhile, remittance inflows through formal banking channels have surged, boosting deposit volumes and adding to liquidity pressures. Consequently, interest rates have fallen sharply:
- Weighted average loan interest rate: 7.99 percent
- Average deposit interest rate: 4.29 percent
- Interbank interest rate: 2.87 percent
This unusual situation of high liquidity coupled with low lending reflects deep structural challenges in Nepal’s banking sector, including a lack of credit demand, weak private sector expansion, and limited bankable projects. If this trend persists, it could affect profitability in the financial sector and delay broader economic recovery.
