Nepal's Liquidity Puzzle: Too Much Money, Too Little Credit — What It Means for NEPSE
Nepal's banking system is flush with liquidity, with deposits at Rs. 8.37 trillion and credit-to-deposit ratio at 71.3%, yet private-sector credit grew only 6.6% in FY 2025/26. This article examines why cheap money isn't translating into borrowing, and what it means for NEPSE investors.
The money is there. The borrowers are not.
That single sentence captures one of the strangest situations in Nepal's financial system today. Banks are flush. Interest rates are low. And yet, credit demand refuses to pick up.
As of September 16, 2026, deposits in Nepal's banking system stood at roughly Rs. 8.37 trillion, while total lending was about Rs. 6.02 trillion. The commercial banking system's credit-to-deposit ratio sat near 71.3% — comfortable, even generous. Meanwhile, Nepal Rastra Bank (NRB) reports that private-sector credit grew just 6.6% in FY 2025/26, even as broad money expanded 13.4%.
Money is growing faster than the demand for it.
Where the Money Comes From
Much of it arrives from abroad. Remittances continue to pour into the country, and once that income enters through the banking channel, it becomes deposits, and deposits become liquidity. NRB has itself flagged high remittance inflows as a key driver of money-supply growth.
But here's the catch: more money entering the system does not mean more people want to borrow it.
Why Borrowing Stays Slow
Textbooks say cheap money should spark investment. Real life is more stubborn.
A business borrows only when it believes the loan will earn a return. If it is unsure about sales, demand, policy direction or the broader economy, a lower interest rate is just a smaller reason to take a risk it doesn't want to take.
NRB's own analysis points to subdued economic activity and weak investment demand as the reasons liquidity is being absorbed so slowly. So the issue may not be that banks aren't lending. It may be that businesses aren't asking.
What This Means for NEPSE
The stock market doesn't live in a separate room from the banking system.
When interest rates fall, fixed-income returns lose their shine, and equities start looking more attractive by comparison. That's a genuine tailwind.
But cheap money alone has never built a durable bull market. Investors also need:
- Earnings growth
- Real economic momentum
- Rising investment
- Business confidence
- Policies they can plan around
Without those, excess liquidity tends to stay parked inside the banking system rather than flowing into productive use.
Liquidity is the fuel. Confidence is the engine.
It's tempting to assume all this idle money must eventually land in NEPSE. That's too simple. Savers also have deposits, bonds and real estate competing for the same rupee. And more importantly, liquidity does not manufacture profits. Sentiment can lift prices for a quarter; earnings are what hold them up for a decade.
The Missing Link
Imagine banks have Rs. 100 to lend. If businesses borrow it to build factories, buy machinery or launch projects, that money enters the real economy. Output rises, jobs follow, corporate earnings improve, and eventually the market feels it.
If nobody borrows, the money simply circles inside the financial system.
There's also a second route worth taking seriously: a deeper capital market. Not every company needs a bank loan. Corporate bonds, equity issuance and mutual funds could let firms raise long-term money directly from savers, reducing the economy's dependence on a single financing channel.
What Investors Should Watch
Follow the chain, not the headline: deposits → credit growth → economic activity → corporate earnings → market valuation.
If deposits keep climbing while credit crawls, the liquidity isn't reaching the real economy. If credit growth accelerates alongside genuine activity, the story changes entirely.
Nepal's challenge is no longer finding money. It's finding somewhere productive to put it.
Money on the sidelines creates liquidity. Money at work creates growth.
Article By: Kriti Jha (An investor and the founder of PrimeTrust Investments)