Despite the gradual decline in lending rates of banks and financial institutions (BFIs), there has been no growth in the demand for loans. With the liquidity situation improving significantly in the last couple of months, BFIs are flushed with investable capital, but bankers say demand for loans has remained subdued. The Nepal Bankers’ Association (NBA) data shows that the demand for loans is very low. According to NBA, commercial banks have added Rs 300bn in deposits in the 10 months of the current fiscal year. However, only Rs 123bn has been disbursed in loans during this period. According to NBA, the lending of commercial banks declined by Rs 10.76bn in the month of Baisakh (mid-April to mid-May). The country’s banking system which grappled with a prolonged liquidity crunch and shortage of loanable funds till mid-January is now flushed with liquidity. With the liquidity position becoming comfortable, banks have been gradually slashing their interest rates. As of mid-May, 2023, the deposits of commercial banks amounted to Rs 4,840bn, while loans totaled Rs 4,299bn.

As per central bank regulatory norms, banks can disburse 90 percent of their deposits in loans. Banks have to maintain the credit-to-deposit ratio (CD ratio) at 90 percent. Bankers say commercial banks are now in a situation to give loans of around Rs 200bn.

As there is no demand for loans currently, the CD ratio of commercial banks has been continuously decreasing. The CD ratio which was 88.07 percent in mid-July, 2022, has fallen to 84.88 percent in mid-May, 2023. According to them, the private sector has not sought bank loans with the deepening economic downturn. NBA data shows commercial banks' credit to the private sector increased by 3.4 percent in the third quarter of this fiscal compared to 13.1 percent. “The demands for loans have remained subdued due to the state of the economy and businesses,” said Nischal Raj Pandey, CEO of Sanima Bank, “While the banks have started reducing interest rates, businesspersons are not showing interest to borrow money.” According to Everest Bank CEO Sudesh Khaling, the decline in interest rates cannot improve the demand for loans. “There must be an improvement in the overall business environment for people to come to banks to borrow money,” said Khaling. Bankers say the other reason behind the sluggish lending is banks have become more cautious in loan disbursement due to a sharp rise in non-performing loans (NPLs). The NPL of commercial banks stood at 3.03 percent till mid-April, 2023.