Commercial Banks’ Rs. 1.02T Exposure to Government Debt: A Double-Edged Sword

Commercial banks in Nepal now hold an overwhelming share of the government’s domestic debt — over Rs. 1.02 trillion as of mid-August 2025/26 — making them the largest financiers of the state’s borrowing needs. While this deepening exposure helps the government manage liquidity and fund fiscal operations smoothly, economists warn that it has become a double-edged sword for both the financial system and fiscal stability.

According to the latest NRB data, commercial banks account for more than 80% of Nepal’s total domestic debt, which has reached Rs. 1.27 trillion. Most of these holdings are in Development Bonds (Rs. 753 billion) and Treasury Bills (Rs. 271 billion). As the central bank reduces its own debt holdings, banks have stepped in aggressively to absorb government securities — attracted by stable returns and low credit risk.

However, this rising concentration exposes banks to sovereign risk and could crowd out private sector lending. With a large chunk of liquidity parked in government papers, lending to businesses and productive sectors may slow, potentially affecting economic growth. Moreover, any fiscal slippage or delay in debt repayments could trigger balance sheet pressures in the banking industry.

Analysts suggest that while the government benefits from domestic borrowing, overdependence on banks could create vulnerabilities if interest rates rise or liquidity tightens. They emphasize the need for diversified investors, such as insurance firms, pension funds, and retail bond buyers, to reduce systemic risks.