IMAGE: CHAUDHARY GROUP
ON SEPTEMBER 29TH the 91-day treasury bill in Nepal yielded 1.01%. Commercial banks charged their borrowers an average of 6.48% in the month to mid-August and paid depositors 3.15%. Between those rates stood Rs8.40trn of deposits, of which banks and finance companies had lent Rs6.04trn by late September. That is a credit-to-deposit ratio of 71%, against a regulatory ceiling of 90%. The Nepal Rastra Bank has cut its policy rate from 5% to 4.25% since July 2025. Private-sector credit is growing at 7.1%; it grew 6.5% in 2025-26, when the central bank had aimed for 12%.
The central bank’s own explanation, in a macroeconomic report published in July, lists four obstacles. Capital rules bind for most banks and the credit-to-deposit limit binds for some. Rising bad loans make bankers cautious. The unrest of September 2025 and a stagnant property market have made borrowers and lenders hesitate. The last matters most, since about three-fifths of bank loans are secured against land and buildings that are not selling. Non-performing loans rose from 4.62% of the total in mid-July 2025 to 5.66% a year later. Loans on the “watchlist” (not yet bad, but showing strain) reached 11.1% in April, up from 6.7% in 2023.
Demand is slim as well. The economy grew 3.85% last fiscal year; the central bank puts its potential rate at about 4.2%, while the budget and the monetary policy both assume 7% this year. The state, which could be the biggest customer for contractors, spent only 32.5% of its capital target in the first eleven months of the year, and capital spending fell 14.8% to Rs191bn. The credit that did flow went to construction (up 18.6%) and consumer loans (up 17.8%). Lending to agriculture fell 1.8%.
Cheap money has a cost, and savers pay it. Inflation stood at 5.14% in mid-July, so a deposit rate of 3.15% loses value each year. Deposits nonetheless rose 13.9% to Rs8.28trn, an increase of roughly Rs1.0trn, in a year when remittances brought in Rs2.36trn. Money arrives faster than business asks for it. The central bank had Rs1.1trn of excess reserves to manage by mid-May, and in early September it put Rs35bn into the market to manage liquidity.
Lower policy rates also take time to reach borrowers. Term deposits make up about 38% of all deposits and cannot be repriced quickly, which the central bank names as the main source of friction. Where banks are told whom to lend to, the results are poor. Banks must place at least 35% of their loans in sectors the regulator specifies. By mid-April agriculture and fisheries accounted for about 23.5% of non-performing loans, construction (hydropower included) for about 10.5% and trade for 10%.
The Bhotekoshi flood of August 26th added a fresh worry. A government assessment put losses in hydropower and transmission alone at Rs151bn. Ministers have since allowed financial institutions to reschedule the loans of affected borrowers once, and the central bank is to offer concessional credit for replacing destroyed vehicles and machinery. Rescheduling keeps a loan alive; it does not make the project behind it earn money. Nor does it tempt a banker into extending a new one.
The government meanwhile plans to borrow Rs410bn at home this fiscal year, part of a budget 25% larger than last year’s revised estimate. If businesses will not borrow, the state will, and the yields on short-term bills (1% to 2%) are modest. The central bank wants private credit to grow 11% this year yet it has also kept the right to tighten if inflation outruns its forecast of 5.5% for the year. Its next monthly report, due in mid-October, will show whether the 7.1% recorded in August is the start of a climb or the limit. ■
