Around Rs 800 Billion Parked at Nepal Rastra Bank Amid Slowdown in Credit Flow

With sluggish credit disbursement in the banking system, around Rs 800 billion has been parked at the Nepal Rastra Bank (NRB), the central bank of the country. Due to excessive liquidity, banks and financial institutions (BFIs) have been depositing surplus funds with the central bank through the Standing Deposit Facility (SDF) and other deposit collection instruments.

Last Sunday, NRB conducted an auction for deposit collection, absorbing Rs 90 billion from the market. The deposits collected through this mechanism will mature after 42 days. Similarly, under the SDF, banks deposited Rs 695.70 billion with NRB on Tuesday, which is set to mature on Thursday.

The interest rate on the auctioned deposits was set at 2.72 percent, while the deposits under the SDF carry an interest rate of 2.75 percent, the lower boundary of NRB’s interest rate corridor.

To manage liquidity and stabilize market interest rates, NRB operates several monetary instruments under its Interest Rate Corridor Procedure, 2019. The upper limit of the corridor is determined by the bank rate, and the lower limit by the deposit collection auction rate, with interbank rates expected to fluctuate within this range.

Over the past two years, the banking system has witnessed persistent excess liquidity, prompting NRB to continuously absorb liquidity from the market. As part of the monetary policy for FY 2023/24, NRB introduced a provision allowing banks to deposit their surplus liquidity under the SDF, which came into effect in February 2025. Initially available twice a week, this facility was expanded to three times a week from June.

To qualify for the SDF, banks must have no outstanding interbank borrowings, maintain their credit-to-deposit (CD) ratio and net liquid assets within the prescribed limits, and ensure that the minimum published interest rate on domestic currency deposits is not lower than the SDF rate.

A director at NRB’s Monetary Management Department said large amounts are being parked at the central bank due to excess liquidity. “NRB’s monetary tools aim to keep market rates within the corridor. However, the SDF has now absorbed huge volumes of funds as banks remain reluctant to take lending risks,” he explained. As liquidity in banks continues to rise, deposits at the central bank have also increased.

According to NRB data, as of mid-October, BFIs had collected Rs 7514 billion in deposits and disbursed Rs 5673 billion in loans. The average CD ratio stood at 74.63 percent as of October 17, indicating that banks still have the capacity to lend over Rs 1100 billion while remaining within the regulatory ceiling of 90 percent. Bankers, however, claim that investing in NRB’s instruments has become a compulsion.

Devendra Raman Khanal, CEO of Rastriya Banijya Bank, said, “With weak credit demand, we are left with no choice but to park excess funds at NRB.” He noted that this trend has intensified since the recent Gen-Z movement began affecting market dynamics.

During the first two months of the current fiscal year, deposits in the banking system grew by Rs 32.86 billion (0.5 percent), while credit flow increased by Rs 49.24 billion (0.9 percent). In the same period last fiscal year, credit had grown by 1.4 percent.

With surplus liquidity piling up, both deposit and lending rates have fallen to decade-low levels. From mid-August to mid-September, the average deposit rate of commercial banks dropped to 3.96 percent, while the average lending rate fell to 7.66 percent, the lowest in the past ten years, according to NRB data.