Nepal's Banks Overflow With Deposits, But Credit Demand Slumps

Nepal's banking sector is experiencing a growing imbalance as deposits continue to surge while credit demand remains weak, reflecting sluggish economic activity and declining private sector confidence. According to the Nepal Rastra Bank's macroeconomic report for the first 11 months of FY 2025/26 (2082/83 BS), deposits in banks and financial institutions increased by 15 percent year-on-year, reaching Rs 8.01 trillion after rising by Rs 748.62 billion during the review period. In contrast, private sector lending expanded by only 6.5 percent, with banks disbursing just Rs 340.57 billion in new loans, leaving billions of rupees in excess liquidity parked within the banking system. Despite the abundance of lendable funds, commercial banks have reduced their weighted average deposit interest rate to 3.29 percent and lending rate to a historic low of 6.64 percent, down from 7.99 percent a year earlier. However, businesses and individuals remain reluctant to borrow due to weak market demand and economic uncertainty. Lending to the agriculture sector, considered a key pillar of Nepal's economy, even declined by 2.4 percent during the review period. Meanwhile, remittance inflows surged by 38.2 percent to Rs 2.12 trillion, further boosting liquidity but failing to translate into productive investment. Economists warn that while abundant liquidity appears positive on the surface, persistently weak credit expansion signals slowing business activity, lower job creation, and mounting pressure on overall economic growth unless policy measures are introduced to revive private sector confidence and stimulate investment.