Nepal’s banking system is currently holding approximately Rs 1.5 trillion in excess liquidity, a figure that had steadily increased to about Rs 1.56 trillion by mid-July 2026, according to data from Nepal Rastra Bank, the central bank. This substantial surplus of funds, largely driven by a surge in remittances, contrasts sharply with a persistent weakness in private sector loan demand, posing a challenge to economic growth.
As of October 7, 2026, banks and financial institutions (BFIs) had Rs 1.363 trillion in excess liquidity, with over Rs 1 trillion available for lending. BFIs have also deposited more than Rs 400 billion with Nepal Rastra Bank, which is paying over Rs 11.68 billion annually in interest on these deposits.
Despite a significant drop in the average lending interest rate for commercial banks to 4-5 percent, loan demand remains weak. This situation has led to a paradoxical scenario where banks are flush with funds but struggle to channel them into productive sectors of the economy.
Remittances Fuel Liquidity Surge
The primary driver of this excess liquidity is the robust growth in remittance inflows. In the first month of the fiscal year 2083/84 (mid-July to mid-August 2026), remittance inflows increased by 21.2 percent to Rs 215.05 billion. In US dollar terms, remittances grew by 10.2 percent to $1.40 billion.
For the first ten months of the fiscal year 2082/83, Nepal received Rs 1.917 trillion in remittances, a 41.2 percent increase compared to the same period the previous year. The National Statistics Office estimates that remittances will reach approximately 33 percent of the Gross Domestic Product (GDP) in the current fiscal year, up from 27.8 percent last year.
This influx of foreign currency has boosted the country’s foreign exchange reserves, which reached Rs 3946.23 billion ($25.84 billion) by mid-August 2026. This is sufficient to cover 21.8 months of merchandise imports and 18.8 months of merchandise and services imports.
Challenges and Government Response
The continuous growth in excess liquidity over the past three years highlights a structural issue within Nepal’s banking sector. While the weighted average lending interest rate for commercial banks reached as high as 13.03 percent in the fiscal year 2079/80, it has steadily declined as liquidity increased and the central bank encouraged lending by reducing interest rates. By mid-June 2026, the weighted average lending interest rate had fallen to an historically low 6.64 percent.
However, this reduction has not translated into increased loan uptake. The private sector’s credit growth was only about 6 percent in the fiscal year 2082/83, significantly below Nepal Rastra Bank’s initial target of 12 percent. Factors such as political instability following the Gen Z movement in September 2025 and a sluggish real estate market have contributed to a reluctance among both borrowers and lenders.
The government’s fiscal situation also shows a deficit. As of October 2, 2026, the government had collected Rs 233.26 billion in revenue against total expenditures of Rs 292.48 billion, resulting in a budget deficit of Rs 59.22 billion.
Future Outlook and Unanswered Questions
In an effort to manage the excess liquidity, Nepal Rastra Bank is taking measures. On October 8, 2026, the central bank announced a 28-day deposit collection auction to withdraw Rs 30 billion from the banking system, with maturity set for November 4, 2026. Additionally, Nepal Rastra Bank has instructed BFIs to make new Rs 100 notes available through ATMs for the upcoming Dashain and other festivals.
Looking ahead, Nepal Rastra Bank has called for research papers on “Economic Growth and Macro-Financial Stability: Risks and Challenges” for a conference by January 31, 2027. Selected papers will be announced by February 20, 2027.
A draft amendment to the Public Debt Management Act, 2079, would allow the government to issue government securities in foreign currency for the first time. This amendment would also introduce thematic bonds, such as green, social, or sustainability-related bonds, and hedging arrangements for exchange rate and interest rate risk management.
