Kathmandu: Nepal’s banking system is drowning in cash. Deposits keep pouring in, but almost no one wants loans, leaving commercial banks with a massive surplus of idle money.
As of early December 2025, banks have parked more than Rs 831 billion with the central bank itself, an all-time high that signals deep structural excess liquidity.
For months, Nepal Rastra Bank (NRB) has been trying to mop up this surplus using short- and medium-term tools: overnight deposit facilities and deposit-collection auctions. Yet these measures have failed to push interbank lending rates back toward the official policy rate of 4.5 percent. Instead, the weighted average interbank rate has repeatedly hugged the floor of the interest-rate corridor at around 2.75 percent, dragging deposit and lending rates down with it.
With existing tools proving inadequate, the central bank is now preparing to deploy a heavier weapon it has never used before: Nepal Rastra Bank bonds, long-term securities (up to one year), designed specifically to lock away excess liquidity for longer periods.
NRB Governor Dr Bishwonath Paudel recently confirmed the plan, saying the bank could issue between Rs 200 billion and Rs 250 billion worth of these bonds. The goal is not just to shrink the liquidity overhang but also to create a floor under falling interest rates and restore some stability to the market.
Deputy Governor Bam Bahadur Mishra told reporters that the proposal is in its final stages and awaits only formal approval from the NRB board. Issuance will likely start small, Rs 10-20 billion at a time, and scale up depending on how much excess cash remains in the system.
The move was already flagged in this year’s monetary policy, which explicitly promised the use of NRB bonds “as needed” to manage structural liquidity. Until now, the central bank had relied entirely on shorter-term instruments, but the sheer size and persistence of the surplus, coupled with weak credit demand, has rendered them ineffective.
Latest figures paint a stark picture: banks have collected Rs 75.35 trillion in deposits but extended only Rs 56.58 trillion in loans, pushing their credit-deposit ratio down to just 74.3 percent. Regulations allow banks to lend until the ratio hits 80 percent, meaning they still have theoretical room to pump another Rs 12 trillion into the economy. Yet with private-sector borrowing near historic lows, that money simply sits idle or gets parked back at the central bank.
The flood of liquidity has driven fierce competition for the few safe assets available. Yields on government treasury bills have collapsed, and banks have slashed both deposit rates and lending spreads to attract whatever business they can.
Issuing NRB bonds is expected to change that dynamic. By pulling large chunks of money out of the system for up to a year, the bonds should force interbank rates higher, give banks an incentive to raise deposit rates to compete for funds, and finally halt the downward spiral in market interest rates.
The bonds will be auctioned exclusively to banks and financial institutions through a uniform-price format: participants bid the interest rate they are willing to accept, and the cutoff rate becomes the single yield for the entire issuance. NRB officials have made clear they will reject suspiciously high coordinated bids if banks attempt to collude.
Unlike treasury bills issued by the government, these central bank bonds will be fully tradable and can even be used as collateral to borrow from NRB if a bank later faces a cash crunch.
Banking-sector analysts welcome the move, saying it is long overdue. For the past three years, Nepal has faced near-continuous excess liquidity, and short-term sterilization tools have only provided temporary relief. A longer-term instrument, they argue, is the only realistic way to restore balance and prevent interest rates from sliding toward zero.
Once the board gives the green light in the coming days, NRB will become one of the few emerging-market central banks to actively use its own bond issuance as a core liquidity-management tool, marking a significant shift in how the country steers its financial system through one of the longest credit slumps in recent memory.
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