Nepal's cheap money fails to spur credit growth

Nepal's economy is awash in cheap money, with commercial banks offering historically low deposit and lending rates. As of mid-May 2026, deposit rates hovered around 3.35%, while lending rates stood at approximately 6.73%. Yet, this abundance of low-cost credit has not translated into robust borrowing. Private-sector credit growth has stagnated at about 6%, significantly missing the Nepal Rastra Bank's target of 12%.

The disconnect highlights a complex economic reality: low interest rates alone do not guarantee increased borrowing or investment. Business owners like Swagat Acharya, who runs a slipper factory, may hesitate to take on debt even at favorable rates if they lack confidence in the economic outlook. Factors such as labor costs, competition, regulatory uncertainty, inflation, and political instability weigh heavily on investment decisions. Essentially, cheap money cannot create profitable opportunities where none exist.

When credit flows freely but productive investment remains sluggish, the excess capital may seek other avenues. This can lead to asset-price inflation, with money pouring into real estate, gold, stocks, or speculative ventures. Depositors also face diminishing returns, as fixed deposit rates hover near or below the inflation rate of around 5%, potentially prompting a shift of capital away from traditional bank accounts.

Banks, facing pressure to maintain profitability amid lower margins, might resort to more aggressive lending practices. This could involve chasing loan growth through volume, potentially leading to a decline in credit quality as they compete for borrowers. Refinancing existing debt with cheaper loans might offer cash flow relief to businesses but does not inherently stimulate new economic activity. The risk is that a pursuit of loan growth could compromise credit standards, creating future financial vulnerabilities.