High Liquidity Prompts Banks to Shy Away from Term Deposits

Banks and financial institutions in Nepal are showing reluctance to accept term deposits due to the build-up of excess liquidity in the banking system, analysts say.

Banks have failed to increase credit flow due to the prolonged slowdown in economic activity compounded by the Gen Z protest in September.

Anticipating limited short-term demand for loans, many banks are reducing interest rates to discourage term deposits. Some large institutions are even bypassing institutional term deposit bidding entirely.

According to Nepal Rastra Bank (NRB) data, as of mid-September 2025, total deposits in the banking sector reached Rs 7331 billion, of which term deposits accounted for 47.9 percent. This is a decline from 56.7 percent in mid-September 2024, indicating a gradual drop in the share of term deposits.

Purbat Kumar Karki, Executive Director of the Citizen Investment Trust, said banks’ reluctance to accept term deposits is creating challenges in fund management.

“Banks are showing little interest in accepting term deposits, which is making fund management difficult,” he said. “We are now relying more on government treasury bills, bonds, and domestic investments to manage our liquidity.”

Karki added that the trust’s current account balances are rising as banks avoid accepting term deposits.

During the COVID-19 pandemic, banks had aggressively extended credit, which temporarily created a liquidity shortage and led them to offer higher interest rates on term deposits. The share of term deposits in total deposits peaked at 60.3 percent in mid-January 2023. However, with interest rate reductions since the start of the current fiscal year, the proportion has fallen below 50 percent.

Badri Kumar Guragain, CEO of Rastriya Sahakari Bank, noted that banks previously marketed deposits to institutional investors, but the situation has now reversed.

“Earlier, investors approached us to place deposits. Now we have to go to them to request term deposits,” he said.

Under NRB guidelines, banks must announce monthly interest rates at the end of every month, with changes allowed up to 10 percent. The difference between maximum and minimum interest rates on deposits cannot exceed 5 percent, and the rate offered to the public must be at least 1 percentage point below the maximum term deposit rate.

The central bank has also imposed certain restrictions on institutional deposits. No single firm or organization can account for more than 10 percent of a bank’s total deposits, and institutional deposits cannot exceed 50 percent of total deposits. As of mid-October 2025, the average term deposit interest rate fell to 5.66 percent, down from 7.71 percent a year earlier.

NRB spokesperson Guru Prasad Paudel said the central bank is absorbing excess liquidity through the Standing Liquidity Facility (SLF), and the interest rate on this facility protects rates for public deposits as well.

“We are deploying monetary tools to address the current excess liquidity problem,” he said. “Funds absorbed at the SLF’s lower corridor rate of 2.75 percent ensure the same rate is secured for public deposits.”

Paudel added that while banks typically compete for deposits in normal conditions, the current excess liquidity has shifted some of the burden to depositors, who now face fewer incentives to place term deposits.