Nepal Rastra Bank in Kathmandu
Nepal Rastra Bank in Kathmandu. The central bank has absorbed around Rs 200 billion from the banking system in August alone. Courtesy nrb.org.np

Across most of the world this year, central banks have been fighting inflation, defending currencies or rationing credit. Nepal has the opposite problem: more money than its economy can absorb.

Nepal's banking system is holding around Rs 1.5 trillion in excess liquidity as remittance inflows surge while demand for loans stays weak. Deposits have grown considerably faster than lending, pushing interest rates to historic lows without meaningfully increasing borrowing or investment.

The surplus is not benign. It is reducing returns for depositors, and forcing Nepal Rastra Bank to spend heavily absorbing funds the banking system cannot deploy.

The absorption operations tell the story

The scale of the central bank's mopping-up is visible in its August auction calendar, which reads less like routine liquidity management than a standing operation.

NRB collected Rs 85 billion in three-month deposits on 5 August. Two days later it issued a Rs 60 billion one-month deposit collection instrument. On 14 August it absorbed a further Rs 20 billion through another one-month instrument. On 19 August it issued a 180-day instrument to collect Rs 35 billion, with principal and interest due in February 2027.

That is Rs 200 billion drained from the system in fifteen days — and the surplus remains.

These operations are not free. The central bank pays interest on every rupee it absorbs, which means the cost of holding money the economy is not using falls on NRB's own balance sheet.

Where the money is coming from

The inflow side of this is genuinely strong, and it is the part Nepal has least control over.

Nepal Rastra Bank's assessment covering ten months to mid-May 2026 recorded remittances surging 41.2% year on year. Foreign exchange reserves stood at Rs 3,704.55 billion, equivalent to 19.2 months of imports — an extraordinarily high level of cover by any standard, and far above what adequacy frameworks require. Inflation was 5.04%, with the current account and balance of payments both in healthy surplus, though a trade deficit persists.

For most economies this quarter, those would be enviable figures. Indonesia is running a current account deficit at 3.3% of GDP and raising rates to defend its currency. Colombia holds its policy rate at 12%. Nepal has the reserves, the inflows and the low rates, and cannot convert them into investment.

Why the money is not moving

The blockage is on the demand side, and the government has begun saying so publicly.

Finance Minister Swarnim Wagle urged Nepal Rastra Bank to shift from being a passive regulator to an active co-creator of economic growth at a meeting with central bank directors earlier this month, arguing that private businesses need consistent rules and reliable execution rather than short-term concessions. He questioned directly why bank liquidity fails to reach productive industries, and called for credit to be directed toward high-yield sectors, startup financing, fintech and job creation.

That framing places responsibility on financial intermediation rather than on monetary settings — a reasonable position when rates are already at historic lows and lending still is not happening.

The underlying picture supports the concern. Non-performing loans have been rising, and borrowers continue to rely on informal lenders, indicating that the problem is not a shortage of funds but a mismatch between where money sits and who can access it. Analysis of the experience in Japan, China and South Korea suggests lower interest rates alone may be insufficient to resolve that.

Nepal Rastra Bank's own research department has estimated the economy has experienced prolonged economic slack since the onset of the COVID-19 crisis in 2020, with only moderate recovery since.

What to watch

The absorption operations are the clearest running indicator. If NRB's auctions continue at August's pace into the autumn, the surplus is structural rather than seasonal.

The second is credit growth. Deposits outpacing lending is the mechanism generating the surplus, and any narrowing of that gap would show up before the liquidity figure moves.

The third is whether the finance ministry's push produces policy. Directing credit toward startups, fintech and job creation is a stated intention rather than a programme, and Nepal has ample liquidity available to fund one if the intermediation problem can be solved.