Nearly Rs. 800 Billion Piled Up at Nepal Rastra Bank as Banks Fail to Lend — Earning Only 2.75% Interest

Kathmandu — Nepal’s banking system is currently sitting on excess liquidity of nearly Rs. 800 billion, which commercial banks and financial institutions have been unable to lend. Due to limited investment opportunities and sluggish credit demand, banks have parked this idle money at the Nepal Rastra Bank (NRB), earning just 2.75% interest.

For an extended period, the banking system has faced excess liquidity as loan demand remains weak despite continuous reductions in lending rates. To manage this surplus, the central bank has been absorbing liquidity almost daily through various monetary instruments such as Deposit Collection Instruments (DCI) and the Standing Deposit Facility (SDF).

According to NRB data as of October 7 (Ashoj 21), banks have deposited Rs. 767.05 billion that they could not lend.
Out of this, Rs. 74.55 billion is through deposit collection instruments, while Rs. 692.50 billion is held under the Standing Deposit Facility (SDF). The SDF funds are set to mature this week.

On the same date, the NRB issued 12-day deposit collection instruments worth Rs. 90 billion, out of which 11 banks and financial institutions placed Rs. 74.55 billion at an average interest rate of 2.74%, maturing on October 18 (Kartik 2). Similarly, NRB also floated a new 11-day Rs. 20 billion instrument today to absorb additional liquidity.

Following the new monetary policy for FY 2025/26, NRB lowered the floor rate of the interest rate corridor from 3.0% to 2.75%.
Consequently, banks now earn less interest on the funds parked at NRB. Until mid-July, banks were earning up to 2.99%, but after the rate adjustment, the return has fallen to 2.75%.

Excess liquidity has been rising as loan demand remains sluggish. The improvement in remittance inflows has further boosted deposits in the banking system.
Moreover, toward the end of the last fiscal year, banks focused more on loan recovery rather than new lending, which has added to the liquidity pile-up.

Analysts say recent factors such as the Gen Z protests, floods, landslides, and political uncertainty have weakened the investment environment. As a result, excess liquidity is expected to persist in the coming months.
The decline in business activity and loan demand has made it difficult for banks to deploy funds, forcing NRB to manage liquidity continuously.

To balance liquidity, NRB uses instruments such as Deposit Collection and Standing Deposit Facility (SDF) to absorb excess money from the market. Conversely, when liquidity tightens, it injects funds through Standing Liquidity Facility (SLF) and Repo operations.