Nepalese Banks Hold Rs 1.3 Trillion in Deposits: Why Are Business Loans Not Increasing Despite Lower Interest Rates?
Image source: Getty Images
Prime Minister Sher Bahadur Deuba and Finance Minister Swarnim Wagle have been holding regular meetings with industrialists, businesspeople, and various stakeholders in the economic sector. A key focus of these discussions has been understanding why businesses remain hesitant to expand investments despite conducive conditions.
Experts say the Nepalese market currently has high liquidity, and banks are ready to disburse loans with interest rates at historic lows. Yet, demand for loans from the business community has not increased as expected, impacting economic momentum.
According to Nepal Rastra Bank spokesperson Guruprasad Paudel, banks currently hold Rs 1.336 trillion in loanable funds. “This liquidity is at its highest level this year with an average interest rate of just 6.5 percent,” he stated.
He explained that this accumulation happened because loan growth has remained stagnant since 2022.
Economists view this situation with concern, interpreting it as a sign of insufficient investment opportunities or lack of business confidence in investing.
“However, it also indicates that banks have adopted a cautious lending policy limited to safe and reliable investments,” Paudel added. “Uncontrolled lending would have risked the entire financial system.”
Officials at the Ministry of Finance believe this stagnation will not persist long. In an interview, Finance Ministry spokesperson Amrit Lamsal expressed optimism that the situation will improve by mid-October.
“The new fiscal year has just started. This is a preparation phase,” he said. “The government will issue policy directives and is committed to supporting investors. We are also making those intentions clear.”
Why the Concern?
In meetings with the Prime Minister and Finance Minister, business leaders and bank executives emphasized the need to build a ‘trust environment’ and improve capital expenditures to strengthen the economy.
Businesspeople have also expressed a decline in trust due to what they perceive as unwarranted government actions.
“We have raised such concerns in our discussions. When businesses face baseless actions, it deteriorates the investment climate,” Santosh Koirala, President of Nepal Bankers Association, told us following a meeting between Finance Minister Wagle and commercial bank executives on Tuesday.
Koirala also urged for policy facilitation in economically promising sectors.
“The hydropower sector is advancing dynamically. We’ve appealed to make collaborations like ‘PPA’ smoother. Likewise, the timely advancement of large projects is crucial to activate the market,” he added.
Koirala is confident that once capital expenditure improves, managing liquidity exceeding Rs 1.5 trillion won’t be challenging.
Impact of Non-Performing Loans
Viirendra Raj Pandey, president of the Federation of Nepalese Industries, points to other reasons for the lack of expected loan flow into the market despite available funds.
“Rising non-performing assets and an increasing number of defaulters on the ‘blacklist’ worsen the problem,” he said. “When defaulters are blacklisted, their accounts get frozen and they cannot invest further. Even with opportunities, the path is closed.”
Statistics from the central bank indicate that the number of blacklisted borrowers is rising annually. In fiscal year 2021/22, 52,303 individuals were blacklisted, which increased to 53,571 in 2022/23, and reached 60,447 in 2025/26. The previous year, 2019/20, recorded only 6,514 blacklisted borrowers.
The main causes for blacklisting include failure to repay loans and issues related to cheque drafts.
“Loan disbursement is impacted due to a lack of creditworthiness,” explained Rastra Bank spokesperson Paudel.
Hope on the Horizon
Image source: RSS
Pandey notes that without active government intervention, it will be difficult to change the scenario where money remains parked in banks.
“The government is making some efforts to regain business confidence, but at the current sluggish pace, the economy cannot develop without financial interventions,” he said. “Increasing capital expenditure is necessary to circulate funds in the market. This would improve asset quality and ensure investments reach the grassroots level.”
“If this does not happen, economic contraction will deepen further.”
Finance Ministry spokesperson Amrit Lamsal says the government is focused on resolving this issue. “Numerous incentives have been included in the budget to facilitate private sector investment. Amendments to banking and financial institution laws are underway. Some improvements have also been made to the Public Procurement Act.”
“With legal, institutional, and procedural reforms along with prior preparations, capital expenditure is expected to rise this fiscal year.”
“Investment will not surge overnight, but considering there is relatively more cash in banks now, it is incorrect to assume this situation will persist indefinitely,” he added. “Once government policies, programs, budget, and monetary policies align, the environment will become more conducive.”
Santosh Koirala of the Nepal Bankers Association expressed confidence in various discussions, saying, “The government is serious about economic improvement and I believe loan disbursement will gradually increase.”
“Although we recently witnessed some adverse events, the situation will gradually shift from instability to stability if the government moves forward in coordination with all stakeholders.”