Deposits turn into a burden as lending stalls, Pressure mounts on Nepal’s banking performance

KATHMANDU: The imbalance in Nepal’s banking system has deepened further, as deposits continue to grow while loan demand remains weak, turning excess liquidity into a financial burden for banks and financial institutions.

According to Nepal Rastra Bank (NRB), total deposits in the banking system have increased by 3.1 percent so far in the current fiscal year, whereas credit extended to the private sector has grown by only 1.2 percent during the same period. Under normal conditions, deposit growth is expected to translate into higher lending. However, the latest data point to persistently weak credit demand, leaving banks with large volumes of idle funds that cannot be deployed productively.

As a result, banks are sitting on hundreds of billions of rupees in loanable funds without viable lending opportunities. This has led to a visible shift in deposit mobilization strategies. While banks have not formally stopped accepting deposits, they have effectively discouraged long-term funds by offering very low interest rates on fixed deposits, suspending bidding processes for institutional deposits, and avoiding long-tenure deposit commitments.

This shift is already reflected in the deposit structure. NRB data show that fixed deposits accounted for 56.4 percent of total deposits in mid-July 2024 (Ashad 2081), but their share had fallen sharply to 45.6 percent by mid-November 2025 (Kartik 2082). As returns on fixed deposits declined, depositors increasingly moved their funds to alternative instruments and sectors.

From the banks’ perspective, deposits have increasingly become a cost rather than an asset. Even when funds remain idle, banks must continue paying interest, squeezing profit margins, interest spreads, and overall financial performance. This pressure has pushed banks to favor low-cost savings and current accounts over fixed deposits in an attempt to manage funding costs.

The situation is further reflected in institutional deposits. As of mid-November 2025, institutional deposits accounted for 35.5 percent of total deposits, marginally lower than 35.8 percent in the same period last year, according to NRB. Although some institutional depositors temporarily shifted funds to treasury bills and short-term instruments when interest rates fell, banks remain reluctant to accept long-term institutional deposits due to limited lending prospects.

Economists argue that rising deposits without corresponding credit growth signal weak demand and subdued investment activity in the broader economy. With industries, trade, and consumption failing to gain momentum, banks have ample liquidity but few creditworthy borrowers. In such a scenario, excess deposits cease to be an opportunity and instead resemble a liability.

Overall, the latest figures present a clear picture of stress within the banking system. While deposits have grown by 3.1 percent, credit expansion remains stuck at 1.2 percent, forcing banks to shift focus from deposit collection to liquidity management. Until economic activity revives and loan demand improves, the condition in which “deposits become a burden due to stalled lending” is likely to persist.

Analysts warn that the continued decline in fixed deposits could have deeper, long-term implications for both the banking system and the wider economy. Fixed deposits are the most stable and predictable funding source for banks. A shrinking share signals structural vulnerability, increasing reliance on short-term savings and current accounts, which can complicate liquidity management and raise the risk of sudden withdrawals—posing potential threats to financial stability.

The fall in fixed deposits also directly affects long-term lending capacity. Financing for industry, infrastructure, energy, and housing is typically backed by long-term deposits. As fixed deposits weaken, banks become more hesitant to extend long-tenure loans, potentially constraining structural investment and economic growth. At the same time, changes in the deposit mix continue to weigh on banks’ funding costs and profitability, adding further pressure to an already strained financial system.