Surge in Lendable Funds at Banks and Financial Institutions as New Fiscal Year Begins
Kathmandu, 23 Jul: With the start of the new fiscal year, the amount of lendable funds (excess liquidity) in banks and financial institutions has significantly increased. According to data from the Nepal Rastra Bank (NRB), while the average lendable amount was around Rs 600 billion over the past 11 months, it surged to Rs 1.05 trillion by the end of Ashar (mid-July).
As of Ashar-end (last Wednesday), the total deposits held by banks and financial institutions stood at Rs 7.292 trillion. During the same period, the credit-to-deposit (CD) ratio was recorded at 75.78%.
According to NRB regulations, banks and financial institutions are allowed to lend up to a maximum of 90% of their total deposits. Based on the data, total credit disbursed during the period amounted to Rs 5.6 trillion. This implies that banks and financial institutions had Rs 1.05 trillion in excess liquidity at the end of Ashar.
However, banks are also required to hold 20% of their total deposits in liquid form (cash or near-cash assets). Maintaining this liquidity requirement effectively reduces their actual lending capacity by approximately one percentage point of the CD ratio.
As a result, although the regulatory CD ratio limit is 90%, the practical lending ceiling is around 89% when accounting for the 20% liquidity requirement. Based on this framework, financial experts estimate that as of the end of Ashar, the financial system still holds approximately Rs 976.90 billion in lendable funds.
Given the current strength of Nepal’s external economic sector and the significant drop in interest rates, the government should now prioritize expanding investment, according to financial expert Parshuram Kshetri Kunwar.
“Increasing credit demand primarily depends on fiscal policy—that is, the government’s role—while monetary policy plays a facilitating role,” he said. “Therefore, in the current context, the government must increase its expenditure to stimulate credit expansion. Even if it means borrowing, the government should ramp up investment in large infrastructure projects and fast-return national pride initiatives.”
He added that many economic indicators are currently favorable and support government investment expansion. To enhance capital expenditure, Kunwar suggested that the federal government must also strengthen the capacity of provincial and local governments.
With liquidity rising in the financial market, the Nepal Rastra Bank (NRB) has once again begun withdrawing funds through long-term instruments—this time for a 42-day period. NRB officials say the decision was driven by forecasts of continued liquidity surplus and a need to manage money supply over the long term.
In the last fiscal year, banks and financial institutions collected deposits worth Rs 796 billion while disbursing loans amounting to only Rs 431 billion. The widening gap between deposit collection and credit expansion prompted NRB to initiate long-term liquidity absorption measures.
NRB had set an ambitious target of 12.5% credit growth for the fiscal year, requiring banks to expand credit by Rs 682 billion. However, as of the end of Ashar (mid-July), actual credit disbursement fell short by Rs 251 billion.
In comparison, during the previous fiscal year (FY 2080/81), deposits increased by Rs 742 billion, while loans rose by only Rs 291 billion. “NRB had aimed for 11.5% credit growth the year before and increased the target to 12.5% last year, which was already ambitious,” noted a CEO of a commercial bank. “Even by the end of Ashar last year, the groundwork for significant credit expansion had not been firmly established.”
For the current fiscal year, NRB has maintained a 12% credit growth target.
Although interest rates have dropped to a 48-month low, credit expansion remains sluggish. Experts attribute this to continued weak demand and underutilization of industrial capacity, with many industries operating at less than half their potential.
To stimulate the economy amid low demand and stagnant economic activity, NRB has introduced a highly accommodative monetary policy for the current fiscal year.
In his first policy statement as NRB Governor, Bishwanath Paudel emphasized expanded credit flows in housing, the stock market, agriculture, and industry. Despite banks sitting on excess liquidity and historically low interest rates, neither the government nor the public has been able to fully benefit from these favorable conditions, NRB argues.
NRB claims that the implementation of its new monetary policy will help maintain price and external sector stability, enhance overall macroeconomic stability, strengthen financial intermediation, expand financial inclusion, modernize and secure the payment system, and support the government’s economic objectives.
However, some experts caution that the policy may carry risks. They argue that the central bank has not done enough to protect depositors’ interests, and that making too many sectors flexible all at once could increase threats to financial stability.
