Banks sit on Rs1.56 trillion in excess liquidity as weak credit demand persists

Banks and financial institutions in Nepal are holding a substantial Rs1.56 trillion in excess lendable funds, a surplus that has grown throughout the current fiscal year. This situation, persisting for the third consecutive year, is attributed to a combination of robust remittance inflows boosting deposits and a notable weakness in demand for loans.

The sluggish expansion of bank lending stems from several interconnected economic factors. Subdued market demand, slow overall economic activity, and industries operating at a mere 42 percent of their capacity have left financial institutions with large volumes of idle funds. A stagnant stock market further exacerbates the situation, offering few alternative avenues for investment or economic stimulation.

Banking experts highlight that while excess liquidity is not a new phenomenon, its current scale is unprecedented. As of July 10, total deposits in the banking system reached Rs8.26 trillion, with outstanding loans at Rs5.94 trillion. Despite the central bank's directive allowing banks to lend up to 90 percent of their deposits, and even after accounting for mandatory cash and liquid asset reserves, the system still holds approximately Rs1.47 trillion in excess liquidity.

Santosh Koirala, president of the Nepal Bankers’ Association, explained that the persistent liquidity surplus mirrors a broader economic slowdown. "Industries are operating at less than half their capacity, and very few new businesses are being established," Koirala stated. "As demand for credit has failed to grow, lending has remained lower than expected. Credit expansion requires stronger economic activity, which in turn depends on increased government spending. Only then will bank lending pick up." He emphasized that banks are ready to lend but are constrained by the lack of viable borrowers.

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Industries are operating at less than half their capacity, and very few new businesses are being established. As demand for credit has failed to grow, lending has remained lower than expected. Credit expansion requires stronger economic activity, which in turn depends on increased government spending. Only then will bank lending pick up.