Deposits Rising in Banks, But Small Financial Institutions Struggle With Loan Recovery

Nepal’s banking system continues to gain public trust as total deposits surge to more than the country’s GDP. However, rising non-performing loans (NPLs) in smaller financial institutions have raised concerns about credit discipline and risk management.

According to the latest financial indicators published by Nepal Rastra Bank for mid-May 2025 (Baisakh end, 2082), the total deposit held by banks and financial institutions stood at 112.73% of the GDP, while the credit-to-GDP ratio was 90.54%. These figures reflect a robust flow of savings and credit in the formal banking sector.

Credit and Deposit Balance

Banks have deployed 80.31% of total deposits as loans, maintaining a balanced credit-deposit ratio. In addition, the CD ratio based on the NRB formula is at 79.13%, staying within a healthy liquidity threshold.

The deposit structure reveals that 50.59% of total deposits are held in fixed-term accounts, 35.74% in savings, and just 5.61% in current accounts. This indicates that the majority of funds in the banking system are locked in long-term savings instruments.

Loan Recovery Weak in Small Institutions

While Class A commercial banks and Class B development banks have maintained relatively stable loan portfolios, Class C financial institutions (finance companies) are showing worrying signs.

Their NPL ratio has surged to 13.04%,
Compared to 5.05% in commercial banks and 5.56% in development banks.

This points to rising credit risk and the need for immediate regulatory scrutiny and stronger loan appraisal systems in smaller institutions.

Liquidity Position

Banks have maintained 7.32% of total deposits as cash and bank balances, and invested 16.59% in government securities. Overall, the total liquid asset ratio stands at 24.85%, indicating strong short-term liquidity across the sector.

Capital Strength

Nepal’s banks remain well-capitalized:

Core Capital to Risk-Weighted Assets (RWA): 9.57%
Total Capital to RWA: 12.42%

Both ratios exceed the regulatory minimum under Basel III norms, reflecting a healthy capital buffer.

Financial Access and Digital Expansion

As of mid-May 2025:

54 licensed financial institutions operate with 6,507 branches nationwide.
There are 59 million deposit accounts and nearly 1.95 million loan accounts.
951 branchless banking centers serve nearly 288,000 rural clients.

Digital penetration continues to grow rapidly:

27.26 million mobile banking users
2.42 million internet banking users
Over 13.5 million debit cards and 306,000 credit cards are in use.

The adoption of digital finance tools signals a major transformation in Nepal’s financial inclusion strategy.

Interest Rates

Weighted Average Deposit Rate: 4.37%
- Savings: 3.38%, Fixed: 5.97%, Call: 1.10%
Weighted Average Lending Rate: 8.11%

The interest spread stands at approximately 3.74%, ensuring a profitable margin for banks.

Expert Views

Financial analysts warn that although overall indicators look positive, the situation in small finance companies must be addressed urgently.

“The growing NPL in Class C institutions shows weak loan screening and poor follow-up,” says a senior banking analyst. “If this is not managed soon, it could undermine the sector’s stability.”

Nepal’s banking system remains strong in terms of deposits, liquidity, capital adequacy, and digital access. However, emerging risks in loan recovery—especially in smaller financial institutions—need to be mitigated through timely regulation, improved governance, and robust credit evaluation practices.