Why Nepal's Banks Are Drowning in Cash but Starving for Borrowers

Here's a genuine paradox in Nepal's banking sector right now: commercial banks are posting some of their strongest profits in years, yet they are sitting on more than a trillion rupees of idle, lendable money because businesses and individuals simply aren't borrowing enough. Understanding why requires looking at one specific number that banking analysts watch closely — the credit-to-deposit (CD) ratio.

Understanding the Credit-to-Deposit (CD) Ratio

The CD ratio measures what percentage of a bank's total deposits have actually been lent out as credit. Nepal Rastra Bank (NRB) permits banks to lend up to 90% of their deposits. A CD ratio comfortably below that ceiling signals unused lending capacity — money that's sitting with the bank (and ultimately with NRB) instead of circulating through the economy as business loans, mortgages, or working capital.

A healthy, growing economy typically pushes the CD ratio up, as businesses borrow to expand and banks compete to lend. A falling CD ratio, on the other hand, usually signals either weak demand for credit, growing caution among lenders, or both.

Current CD Ratio Data

As of mid-June 2026, Nepal Rastra Bank's own published data put the system-wide CD ratio at 72.91%, with commercial banks alone at 71.83%, development banks higher at 84.31%, and finance companies at 76.87%. This continues a multi-year downward slide: the ratio stood at 78.89% at the end of fiscal year 2023/24, fell to 75.78% by the end of 2024/25, and has kept sliding through 2026 rather than reversing.

The Deposit-Credit Gap

In concrete terms, NRB data shows total banking-system deposits of roughly Rs 8.05 trillion against total outstanding credit of about Rs 5.92 trillion — a gap of more than Rs 2 trillion. After accounting for the mandatory liquidity reserves banks must hold, this leaves an estimated Rs 1.3 to 1.5 trillion in genuinely excess, lendable funds sitting idle across the system as of mid-2026. To manage this surplus, NRB has been actively absorbing funds through bond issuances and deposit collection instruments, with the cost of doing so expected to roughly triple compared to the prior year.

Which Banks Lend Aggressively vs Conservatively

CD ratios vary considerably from bank to bank. Institutions like Citizens Bank International, NMB Bank, and Prime Commercial Bank have historically run some of the higher CD ratios in the sector — in the 83–84% range — reflecting a more aggressive lending posture relative to their deposit base. By contrast, state-owned banks such as Rastriya Banijya Bank and Nepal Bank have maintained noticeably more conservative ratios, often in the 62–71% range, consistent with their traditionally cautious, government-influenced lending approach.

Root Causes: Weak Demand, Risk Aversion, Economic Slowdown

Several structural factors are feeding this liquidity glut simultaneously. Nepal's GDP growth slowed to a preliminary 3.85% in FY 2025/26, down from a revised 4.43% the year before — its weakest pace in three years. Remittance inflows, meanwhile, continue to fuel steady deposit growth almost independent of domestic economic activity, widening the gap further. On the lending side, banks have also become more cautious after non-performing loans (NPLs) climbed sharply in recent years, making them more selective about which businesses and individuals they're willing to lend to, even with ample funds on hand.

Impact on Borrowers, Depositors, and the Economy

For borrowers, excess liquidity is, in theory, good news: it should make loans easier to access and, over time, cheaper. For depositors, it's the opposite — banks facing idle cash have been steadily cutting fixed deposit rates to reduce their funding costs (see our companion post on current FD rate trends). For the broader economy, persistently weak credit growth despite available capital points to deeper structural issues — subdued private investment confidence, political and policy uncertainty, and cautious business sentiment — that monetary policy alone cannot fully resolve.

What Could Change This in FY 2026/27

A meaningful reversal would likely require a combination of factors: renewed private-sector investment confidence, government capital spending picking up, easing of NPL pressure allowing banks to lend more freely, and policy measures that channel idle liquidity toward productive sectors rather than leaving it parked at the central bank. NRB has already begun easing select lending rules — for instance, raising the loan-to-value ratio for large electric public-transport vehicles from 60% to 80% — as one small step toward encouraging credit flow into specific priority sectors. Whether broader demand recovers meaningfully in FY 2026/27 remains an open question that will depend heavily on the pace of Nepal's overall economic recovery.

Frequently Asked Questions

What is a good CD ratio for a bank?

There's no single "ideal" number, but a CD ratio too close to the 90% regulatory ceiling can signal limited room for further lending, while a ratio well below 75% (as seen sector-wide in Nepal currently) signals significant unused lending capacity.

Is excess liquidity good or bad for the economy?

It's a mixed signal. It shows the banking system has ample funding capacity, which is generally positive, but persistently high excess liquidity alongside weak credit growth often points to underlying weak investment demand or economic caution, which is a concern for growth.

Why are bank profits rising if lending is weak?

Profits have grown largely because falling deposit rates have cut banks' funding costs faster than their lending income has declined, alongside improved loan recovery — not because of a broad-based expansion in new productive lending. We cover this in detail in our bank profit rankings post.

Does this affect regular bank customers?

Yes — depositors are seeing lower FD and savings rates, while, in principle, qualified borrowers should find it easier (and eventually cheaper) to access loans, though actual loan approval still depends on individual creditworthiness and each bank's risk appetite.