BFIs Struggle With Excess Liquidity Despite Lower Interest Rates and Credit Demand Slowdown

Despite the onset of Fiscal Year 2025/26, Nepal's banks and financial institutions (BFIs) continue to face a prolonged state of excess liquidity. In response, Nepal Rastra Bank (NRB) has stepped up its liquidity absorption efforts. On Wednesday, the central bank sought to withdraw Rs. 25 billion through a bidding process—marking the fourth such intervention in just two weeks. In total, Rs. 194.35 billion has been mopped up so far in the current fiscal year, pushing the central bank’s total deposit holdings to over Rs. 591 billion.

The central bank has been deploying various monetary tools such as open market operations, interest rate adjustments, reverse repos, fixed deposits, and changes in reserve requirements to absorb surplus liquidity. However, the continued stagnation in loan demand—fueled by an ongoing economic slowdown—has prevented BFIs from expanding their credit portfolios, despite a consistent reduction in interest rates. Over the past year, commercial banks have slashed their average base rates by 2.03 percentage points. For mid-July to mid-August, the average base rate stood at 6.1 percent, down from 8.13 percent during the same period last year.

Although the reduction in interest rates was aimed at encouraging borrowing, the credit-to-deposit (CD) ratio has dropped to 75.98 percent—well below the regulatory threshold of 90 percent. As of Sunday, BFIs had mobilized Rs. 7.223 trillion in deposits but extended only Rs. 5.562 trillion in loans. The persistent mismatch between rising deposits and limited lending reflects underlying economic uncertainties and weak credit appetite in the market.