Cash & Bank Balance Covers 7.8% of Deposits: Healthy Cushion or Liquidity Stress?

As of Saun End, 2082 (Mid-August 2025), Nepal’s banking sector maintains cash and bank balance equivalent to 7.80% of total deposits, providing an important buffer for liquidity management. Commercial banks (Class “A”) hold slightly higher coverage at 7.96%, while development banks (Class “B”) and finance companies (Class “C”) maintain lower levels of 6.35% and 7.03% respectively. This indicator offers a glimpse into the sector’s short-term liquidity health, revealing both strengths and vulnerabilities.

On the positive side, a nearly 8% cash-and-bank balance ratio signals that banks are keeping a healthy portion of their deposits in highly liquid form, ready to meet withdrawal demands, interbank settlements, or sudden cash requirements. For a banking system where deposit mobilization stands at over 118% of GDP, such a liquidity cushion reinforces depositor confidence and ensures smooth day-to-day functioning without immediate reliance on central bank support.

However, viewed from another angle, this relatively modest ratio also points to the growing strain on liquidity in the system. With a Credit-to-Deposit (CD) ratio of 76.19% and rising demand for loans, banks are deploying the bulk of their deposits into credit and investments. While this supports economic growth, it leaves less room for cash reserves. If deposit growth slows or large-scale withdrawals occur, especially in smaller institutions, the banking sector could face funding pressures.

Moreover, the structure of deposits adds another layer of complexity. With 48.14% of deposits locked in fixed accounts, banks enjoy stability but at higher costs, while savings and current deposits that provide more liquidity flexibility are relatively lower. This means that while banks are technically liquid, they may be less agile in responding to sudden shocks without turning to interbank borrowing or Nepal Rastra Bank’s liquidity facilities.

In short, the 7.8% coverage level reflects a cautious but constrained liquidity position. It provides enough comfort for normal operations but also highlights the need for careful monitoring, particularly as credit demand grows and risks from rising non-performing loans (NPLs at 4.62%) put additional pressure on balance sheets.