Deposits in BFIs near record NPR 7 trillion amid sluggish loan growth

KATHMANDU, MAY 23: Deposits in Nepal's banks and financial institutions (BFIs) have reached an all-time high, totalling NPR 6.892 trillion, according to Nepal Rastra Bank (NRB).

The central bank reported a single-day increase of NPR 700 million in deposits, rising from NPR 6.885 trillion last Tuesday to NPR 6.892 trillion last Wednesday. Despite this surge, loan disbursement has remained stagnant at NPR 5.529 trillion over the same period.

Commercial banks account for the largest share of deposits, holding NPR 6.158 trillion, while other financial institutions account for NPR 735 billion. On the lending front, commercial banks have disbursed NPR 4.912 trillion, and other financial institutions have extended NPR 617 billion.

 

Excess liquidity and unmet lending targets

As per the monetary policy guidelines, the BFIs are permitted a credit-to-deposit (CD) ratio of up to 90 percent. However, they are currently maintaining a significantly lower CD ratio of 79.02 per cent, indicating that approximately NPR 674 billion remains available for investment.

The central bank had projected a 12.5 percent increase in loans for the current fiscal year, but by mid-April, loan growth stood at only 7.1 percent. A major concern is the redirection of new loans toward imports and stock purchases, rather than productive sectors that generate employment and stimulate economic activity. Additionally, several banks face capital adequacy constraints, as they are required to maintain a minimum capital adequacy ratio of 8.5 percent based on risk-weighted assets.

According to the Nepal Bankers’ Association, the banks currently hold nearly NPR 690 billion in investable liquidity. Due to increased financial risks and tepid demand for loans, they have adopted a more conservative lending stance, leading to continued deposit accumulation. Higher remittance inflows have further contributed to this trend. Economists caution that the widening gap between rising deposits and slow credit growth could jeopardise the government's 6 percent economic growth target.

 

Banks holding colossal investable capital

Based on the CD ratio, banks currently have around NPR 674 billion available for investment. As of yesterday, NPR 363.45 billion of this amount remained unutilized and was placed with the central bank through the Standing Deposit Facility (SDF) and other deposit instruments.

Of this, NPR 172.95 billion is under the SDF, and NPR 190.50 billion is awaiting maturity in deposit mobilization tools. Just last Wednesday, the central bank mopped up an additional NPR 5 billion in liquidity through these instruments.

Although external economic conditions have improved, domestic sluggishness continues to suppress loan demand. With the deposits augmenting due to high remittance inflow but loan disbursement remaining minimal, the banks have diverted excess liquidity into short-term central bank instruments.

 

Loan growth is slow despite lower interest rates​​​​​​​

According to NRB data, as of mid-April of 2024/25, the BFIs disbursed an additional NPR 361.3 billion in loans. However, with nearly NPR 690 billion in investable funds still unused, the target loan growth of 12.5 percent remains unfulfilled, with actual growth reaching only 7.1 percent.

A core issue lies in the allocation of credit. The import-related loans rose by 60.6 percent and share-backed loans by 37.8 percent. Such growth do not help directly in generating employment or enhancing productive capacity. The import-related loans have largely gone toward consumer goods, rather than industrial raw materials or construction inputs. Meanwhile,  the loans to industrial production increased by only 9.6 percent, to construction by 11.4 percent, and to service industries by 8.6 percent.

During the first nine months of the current fiscal year, 65.2 percent of the total loans extended by the BFIs were secured by real estate collateral, while 14.6 percent were backed by current assets (both agricultural and non-agricultural goods).

In sectoral terms, credit increased by 9.6 percent to industrial production, 11.4 percent to construction, 5.2 percent to wholesale and retail trade, 10.2 percent to transport, communication and public services, 8.6 percent to services, and 8.3 percent to personal consumption.

From mid-June to mid-April, disbursed loans included a 4.9 percent increase in periodic loans, 37.8 percent in margin lending, 60.6 percent in trust receipt (import) loans, 4.1 percent in hire purchase, 5.2 percent in cash flow lending, and 4.9 percent in real estate loans (including personal housing). In contrast, overdraft lending declined by 12.1 percent.

The central bank’s recent focus on improving loan quality has yielded modest gains in credit disbursement. Sectors such as hydropower, wholesale and retail trade, and personal consumption have shown some signs of recovery. However, loan growth remains subdued in agriculture and construction. Bankers are optimistic that credit demand will pick up as business confidence improves, especially if key sectors such as construction and industry—both of which experienced contraction in the last two fiscal years—begin to recover.

 

Interest rates drop, but credit demand remains weak​​​​​​​​​​​​​​

Despite a continued downward trend in both deposit and lending rates over the past 26 months, credit uptake remains sluggish. Domestic economic inertia continues to weigh down loan demand, even amid improving external conditions.

 

Average interest rates by loan type​​​​​​​​​​​​​​

Recent NRB data show that weighted average lending rates have fallen close to 8 percent. As of mid-April, the average loan interest rate stood at 8.22 percent for commercial banks, 9.59 percent for development banks, and 10.40 percent for finance companies.

The average benchmark rate for commercial banks has declined to 6.29 percent, and falling deposit rates have further lowered funding costs. As of mid-April, the average deposit rate was 4.45 percent for commercial banks, 5.22 percent for development banks, and 6.24 percent for finance companies.

Currently, all loans issued by commercial banks carry interest rates below 9 percent. By mid-April, the average loan rate had declined to 8.22 percent. The highest rate was 8.79 percent, while loans issued to economically disadvantaged groups carried the lowest average rate of 6.94 percent.

The breakdowns by loan type reveal that overdraft loans stood at 8.64 percent, periodic loans at 8.30 percent, working capital at 7.31 percent, residential loans at 8.44 percent, real estate loans at 8.55 percent, share-backed loans at 8.12 percent, hire purchase at 8.59 percent, cash credit at 8.25 percent, and bill purchase loans at 7.92 percent.