IMAGE: GUY BERRESFORD
REGULARLY, OFTEN twice a week, the Nepal Rastra Bank conducts an unusual ritual. It issues instruments to soak up money that Nepal’s banks are desperate to offload, paying them a modest rate to park funds they cannot find borrowers for. On a single day in February the central bank absorbed Rs157bn in liquidity through a combination of deposit collection instruments and standing deposit facilities—accepting bids from 17 institutions that had collectively offered Rs74.9bn, more than twice the Rs30bn it was willing to absorb.
Total deposits in the banking system now stand at some Rs 7.9trn. Total loans outstanding amount to Rs5.8trn. The credit-to-deposit ratio (a measure of how productively banks are deploying their resources) is some 74%, against a regulatory ceiling of 90%. Banks have, by one calculation, more than Rs1.1trn in immediately lendable funds going nowhere.
This is not about tight money. Nepal’s policy rate is 4.25%, its lowest in years. Average lending rates have fallen to around 7%; deposit rates trail at 3.51%. The interbank rate (what banks charge each other for overnight cash) has dropped to 2.75%, a level that signals not a shortage but an embarrassment of liquidity. “Even as interest rates continue to fall, there has not been any significant new demand for loans from the private sector,” said Tilak Raj Pandey, chief executive of Nepal Bank Limited, in an interview published by Spotlight, a local outlet. “Businesses still have not brought forward plans to expand investment. Credit flow has not increased.”
His summary doubles as the NRB’s own, delivered in the third quarterly monetary policy review published around mid-May: the financial system has maintained a highly liquid state for three consecutive years, and such circumstances could have an impact on macroeconomic indicators.
The obvious question is why. Interest rates are low. Banks are eager. Regulatory headroom is ample. And yet the money does not move. The answer requires looking past the banking system into the economy it is supposed to serve—and into the peculiar structure of the savings that are flooding in.
Remittances are the engine. Nepal received $11.55bn in remittances in the first nine months of the current fiscal year, a 32% bump on the same period the previous year, according to NRB data. According to the World Bank, over 77% of Nepal’s formally documented migrant workers are based in the Middle East, with their monthly transfers landing reliably in rural bank accounts whether the domestic economy is expanding or contracting; the Gulf region accounts for roughly 40% of all remittance inflows. The World Bank projects the current account surplus at 8.5% of GDP for this fiscal year, driven almost entirely by that remittance inflow.
Deposits rise not because Nepali businesses are generating profits and saving them, but because foreign wages are being wired home. The two look identical on a bank’s balance sheet. Their economic implications are entirely different, however.
A wage remitted home by a construction worker in Qatar funds school fees and a new tin roof; it does not, in the ordinary course of things, fund a factory or a hotel expansion. Entrepreneurs who might borrow to build factories face a different set of signals: three years of subdued economic growth, projected at just 3.85% for the current fiscal year by the National Statistics Office—and as low as 2.3% by the World Bank’s most recent estimates.
Industries, construction and wholesale trade have seen negative credit growth for three consecutive years, according to official data. The September 2025 unrest and subsequent elections introduced a further layer of uncertainty; the World Bank estimates the political upheaval cost roughly 1.3% of GDP in direct economic losses. Capital expenditure by the government (the spending that would create construction contracts, infrastructure demand and multiplier effects downstream) ran at just 12.1% of budget in the first half of the current fiscal year. Without a government pulling money through the system, private borrowers see little reason to push it.
The NRB’s third quarterly review acknowledges the bind but offers no remedy. It held the policy rate and the interest rate corridor unchanged while announcing that the Standing Deposit Facility (the mechanism through which banks park overnight surplus funds at the central bank) will be reviewed to make the interest rate corridor “more effective and systematic”. The signal is technical and narrow: if the floor rate on the SDF is lowered, banks will earn even less on their idle reserves and will, in theory, be nudged towards lending.
The logic is sound in textbooks. In Nepal’s current environment, where the constraint is not the price of money but the absence of creditworthy demand, it is less clear that tinkering with the floor will move much.
The government’s policy document, presented to parliament on May 11th, gestures towards an answer. It declares the coming decade an “Employment Promotion Decade”; promises a Remittance Investment Fund to channel foreign earnings into productive enterprise; and commits to raising capital expenditure execution. Economist Kalpana Khanal, quoted in the Kathmandu Post, called the government’s 7% growth ambition “challenging but not impossible” if capital spending genuinely accelerates and private investment follows. Foreign direct investment, which currently amounts to a remarkable 0.2% of GDP, would also need to rise—though the administration’s anti-corruption raids, however justified in principle, have rattled some investors uncertain about the rules of engagement.
The paradox at the heart of Nepal’s banking system is that it has too much money and too little economy. Monetary policy has done what it can: rates are low, regulations are loose and the central bank mops up regularly to prevent the excess from destabilising short-term rates.
What it cannot do is manufacture the investment appetite that makes credit useful. That requires a government that spends its capital budget on time. A private sector that believes tomorrow will be more predictable than today. And an economy that offers returns on productive enterprise rather than just on parking cash in Kathmandu’s real estate.
Until those conditions materialise, Nepal’s banks will keep queuing up to lend their surplus back to the central bank—at 2.75%, and gratefully. ■
