Commercial Banks Hold Over Rs. 1 Trillion of Nepal’s Domestic Debt – Rising Fiscal Risks?

Commercial banks have emerged as the dominant players in Nepal’s domestic debt market, holding Rs. 1.02 trillionworth of government securities as of mid-August 2025/26. According to the latest data from the Nepal Rastra Bank, this marks a slight decline of Rs. 7.5 billion compared to the previous month, but commercial banks still account for over 80 percent of total domestic borrowing, underscoring the growing fiscal reliance on the banking sector.

The government’s total domestic debt has reached Rs. 1.27 trillion, with development bonds (Rs. 913.7 billion) and treasury bills (Rs. 348.4 billion) being the two main instruments. While the NRB itself has drastically reduced its exposure (down by Rs. 53.8 billion), the burden of financing fiscal operations has increasingly shifted to commercial banks.

Analysts warn that this trend may crowd out private investment, as banks allocate a large share of deposits to low-risk government securities rather than productive business lending. With liquidity tightening in the private sector and credit growth slowing, the fiscal dependence on banks could deepen systemic risks if the government continues aggressive domestic borrowing.

The dominance of banks in public debt also gives them strong influence over interest rate movements in the bond market, potentially raising the cost of future borrowings. On the other hand, for banks, government securities remain a safe and stable source of income amid uncertain private credit conditions.