Kathmandu— In the last fiscal year 2025/26, Nepal's banks and financial institutions (BFIs) experienced a notable imbalance between deposit growth and private sector credit expansion, according to data from Nepal Rastra Bank. Deposits increased by 13.9 percent to Rs. 8,276.93 billion, while private-sector credit only grew by 6.5 percent to Rs. 5,857.06 billion—a slowdown from the previous year’s growth rates. This disparity indicates a build-up of liquidity within the banking system that is not being fully absorbed by loan demand, potentially leading to lower lending rates and shifts in depositor preferences.

Deposit Trends and Shifting Preferences

The composition of deposits also underwent changes during the fiscal year. Saving deposits saw a substantial increase, rising to 47 percent of total deposits as of mid-July 2026, up from 36.8 percent a year earlier. Conversely, fixed deposit shares declined from 48.3 percent to 35.3 percent. Demand deposits also increased slightly, accounting for 8.1 percent of the total. This shift suggests that depositors are increasingly favoring more liquid savings options, potentially influenced by declining returns on fixed deposits and changing expectations regarding interest rates.

Credit Expansion Remains Uneven

While overall credit growth was modest, lending activity varied across different sectors. Loans to the construction sector experienced a significant increase of 18.6 percent, followed by consumable goods (17.8 percent) and transportation/communication/public sector (15 percent). Industrial production saw a more moderate rise of 5.2 percent, while loans to agriculture actually decreased by 1.8 percent. The majority of private-sector credit continues to be directed towards non-financial corporations (62.1 percent), with the remainder going to households (37.9 percent).

Monetary Policy and Liquidity Management

Nepal Rastra Bank actively managed liquidity during the year, absorbing a net Rs. 42516 billion through various monetary instruments—a substantial increase from the Rs. 24,648 billion absorbed in the previous fiscal year. This was achieved primarily through deposit collection auctions and the Standing Deposit Facility (SDF). Despite this absorption, the central bank also injected liquidity into the system by purchasing US dollars in the foreign exchange market, resulting in a net absorption of Rs. 42,503.70 billion.

Impact on Lending and Deposit Rates

The combination of increased deposits and slower credit growth is exerting downward pressure on lending rates. The weighted average 91-days Treasury bills rate decreased to 2.32 percent in mid-July 2026, down from 2.95 percent a year earlier. Similarly, the weighted average inter-bank rate fell from 2.96 percent to 2.75 percent. Average base rates for commercial banks also saw declines, indicating an overall trend towards lower borrowing costs.

Sectoral Loan Distribution

Examining loan types, trust receipt (import) loans increased significantly by 32.2 percent, while margin loans rose by 18.3 percent and hire purchase loans by 11.1 percent. Term loans saw a modest increase of 4.3 percent, but cash credit loans decreased by 1.8 percent. This indicates a shift in lending towards specific types of financing, potentially reflecting changing economic conditions and consumer behavior.

The continued divergence between deposit and credit growth is expected to influence monetary policy decisions and interest rate trends in the coming months as Nepal Rastra Bank seeks to balance liquidity management with supporting economic activity.

(With inputs from RN)

Originally published on abcnews.com.np.