Average bank lending rate in Nepal falls to 7% in mid-February as excess liquidity pressures interest rates

KATHMANDU: The average lending interest rate of Nepal’s banking sector has declined sharply to 7 percent by the end of Magh 2082 BS (mid-February 2026 AD), reflecting easing credit conditions, abundant liquidity in the financial system, and relatively weak demand for loans.

According to data released by the Nepal Rastra Bank (NRB), the weighted average lending rate of banks and financial institutions has dropped by 1.55 percentage points compared to the same period last fiscal year.

During Magh 2081 BS (mid-February 2025 AD), the average lending rate stood at 8.55 percent.

The central bank says the decline in borrowing costs is primarily driven by a fall in banks’ base rates, combined with excess liquidity in the financial system and subdued credit demand from businesses and households.

Lending Rates Fall Across Banking Categories

Interest rates have declined across all categories of banks and financial institutions.

As of Magh 2082 BS, the weighted average lending rates were recorded as:

Commercial banks: 7 percent

Development banks: 8.30 percent

Finance companies: 9.56 percent

In comparison, during the same period last fiscal year, lending rates were significantly higher:

Commercial banks — 8.55 percent

Development banks — 9.90 percent

Finance companies — 10.88 percent

The data indicate that the reduction in lending rates has been broad-based across Nepal’s banking system.

Base Rates Continue to Decline

The central bank attributes the decline in lending rates largely to falling base rates maintained by banks.

By the end of Magh 2082:

Average base rate of commercial banks: 5.12 percent

Development banks: 7.19 percent

Finance companies: 7.89 percent

Just one month earlier, in Poush 2082 BS (mid-January 2026 AD), the average base rate of commercial banks was 5.29 percent.

During the same period last fiscal year, base rates were substantially higher:

Commercial banks — 6.46 percent

Development banks — 8.52 percent

Finance companies — 9.39 percent

The drop in base rates has directly contributed to the decline in lending interest rates offered to borrowers.

Deposit Rates Also Decline

Deposit rates across Nepal’s banking sector have also fallen as financial institutions struggle to deploy excess liquidity.

By the end of Magh 2082:

Commercial banks’ weighted average deposit rate: 3.51 percent

Development banks: 3.97 percent

Finance companies: 5.01 percent

In contrast, during the same period last year, deposit rates were notably higher:

Commercial banks — 4.62 percent

Development banks — 5.41 percent

Finance companies — 6.47 percent

The fall in deposit rates reflects weaker competition for deposits as banks currently hold surplus funds.

Excess Liquidity and Weak Loan Demand

Financial analysts say the primary factor behind falling interest rates is excess liquidity in Nepal’s banking system combined with relatively modest demand for new loans.

Over the past year, several factors have contributed to rising liquidity levels:

Strong inflows of remittances

Improved balance of payments position

Slow expansion in private sector borrowing

Tight risk assessment by banks following previous credit stress in sectors like real estate

With more funds available than borrowers seeking credit, banks have been forced to lower both lending and deposit rates.

Potential Boost for Investment and Consumption

Lower borrowing costs could help stimulate economic activity in the coming months.

Economists note that falling lending rates typically encourage:

Business investment

Infrastructure development

Consumer borrowing for housing and durable goods

Expansion of small and medium enterprises

However, the overall impact will depend on the confidence of businesses and consumers to borrow and invest.

Central Bank Monitoring Credit Growth

The Nepal Rastra Bank continues to closely monitor credit growth and liquidity conditions to maintain financial stability.

While lower interest rates may support economic recovery, policymakers also remain cautious about excessive credit expansion that could create asset bubbles or financial sector risks.

For now, the declining interest rate environment suggests that Nepal’s banking sector is transitioning toward more accommodative financial conditions, potentially supporting a gradual recovery in economic activity after the slowdown experienced in recent years.