Nepal Rastra Bank (NRB) has set an ambitious target for private sector lending in the upcoming fiscal year 2025/26, even as the banking system continues to wrestle with mounting excess liquidity and sluggish credit demand.
Unveiled on Friday, the new monetary policy outlines a 12 percent growth target for private sector credit—mirroring the 12.5 percent target from the current fiscal year, which has seen actual lending fall short at just above 8 percent.
In the past 11 months alone, the central bank has withdrawn a staggering Rs 21.34 trillion in surplus liquidity from the financial system—over five times more than the Rs 3.83 trillion mopped up in the previous fiscal year. Of this, Rs 2.78 trillion was absorbed through competitive bidding, while Rs 18.55 trillion was parked under the Standing Deposit Facility, a short-term monetary instrument.
This excess cash reflects a deeper issue: banks and financial institutions (BFIs) have been unable to channel funds into the economy due to poor lending opportunities. Despite interest rates falling to a three-year low, loan demand remains subdued.
Bankers attribute the sluggish credit expansion to a host of challenges—weak economic activity, increasing non-performing loans, and tighter regulatory measures. “Without investor confidence and market momentum, lowering interest rates alone won’t stimulate credit flow,” said one banker.
To push credit growth, the NRB has introduced several easing measures:
- The bank rate has been cut to 6 percent from 6.5 percent.
- The lower bound of deposit rates has been reduced to 2.75 percent, down from 3 percent.
- The policy rate now stands at 4.5 percent, compared to 5 percent earlier.
- The money supply growth has been capped at 13 percent.
However, experts caution that these moves may not yield results under current conditions. Prakash Kumar Shrestha, former executive director of NRB, warned that the country could be heading toward a liquidity trap—where ample money supply fails to translate into investment or growth. “You can’t inject confidence into a stagnant economy just by cutting rates,” he said.
As the new fiscal year approaches, all eyes are on whether this expansionary monetary policy can overcome structural hurdles and revive real economic activity—or if it will fall short amid a credit market still struggling to regain momentum.
