Nepal is experiencing historically low interest rates, with lending and deposit rates exceptionally low by the country’s own standards. As of mid-May 2026, the numbers make this clear.
The commercial banks’ weighted average deposit rate stood at 3.35%, while the weighted average lending rate was 6.73%. The commercial banks’ base rate stood at 4.97%.
So, if all the rates are cheap, why isn’t credit growing?
First, it is important to be clear that cheap credit does not necessarily create credit demand. The traditional assumption is that lower interest rates bring cheaper loans, which lead to higher borrowing, higher investment and higher economic growth. Despite lending rates falling to around 6.7%, however, credit growth has remained subdued. Nepal Rastra Bank reports private-sector credit growth of around 6%, far below the 12% target.
This shows why the relationship between interest rates and credit growth is not straightforward. Interest rates are only one component of credit demand. People tend to borrow when they see investment opportunities, demand for their products, confidence in the economy, a predictable economic future, predictable regulations, expected profitability and political stability.
This raises the real question: “Cheap money may not always support profitable investment opportunities.”
The bigger question, then, is what happens to that cheap money when people do not see profitable opportunities to put it into?
One possible outcome is asset-price inflation. If credit becomes cheaper while productive investment remains weak, money can flow into assets rather than production, with potential destinations including real estate, gold, shares, private vehicles or even speculative assets. With fixed deposit rates falling near or below the inflation rate of around 5%, depositors face negative or near-zero real returns. Capital may therefore shift out of formal bank deposits.
Another possibility is that banks may become more aggressive. With cheaper pricing, banks may tend to increase their profitability through volume-based lending. That can result in aggressive lending and more competition for quality borrowers.
Banks may also focus on fee-based income. Existing borrowers may use cheaper loans to refinance expensive debt, which does not necessarily create new economic activity, although it may help manage the borrower’s cash flow. If banks chase loan growth simply to compensate for lower margins, credit quality can deteriorate.
This can be best explained with a simple hypothetical example. Say Swagat Acharya is a businessman who runs a slipper factory where he expects the rate of return to be around 6% from his business operation, and he can borrow at 7% per annum. Considering the economic scenario, including labour costs, competition, regulatory risk, inflation and political instability, Acharya may feel reluctant to borrow the loan even though borrowing rates are historically low.
Now, say rates fall further to 5.5%. What should Acharya do? The investment still may not happen if he believes the project will generate only 6% while carrying substantial risk. Instead of investing in the business, he may look toward investment in speculative assets where he could get a higher return.
It is also important to look at the banks’ side. Credit may not be growing faster only because people do not want to borrow. Banks have also become more cautious after years of rising bad loans and higher provisioning requirements. Even when banks have plenty of money to lend and interest rates are low, they may still hesitate to lend to riskier borrowers. So, the slowdown is likely a combination of two things: borrowers are not seeing enough profitable opportunities, and banks are becoming more careful about where they lend.
So, what should be done?
The focus has to shift from “cheap money” to “productive use of money.”
This is where both the government and the banking sector have a role to play.
The government needs to create profitable investment opportunities in sectors where Nepal has comparative advantages, such as hydropower, tourism, agriculture, IT and infrastructure. It also needs to improve investor confidence. Stable policies, taxation, regulations and licensing can be more powerful for investment than another 1% reduction in lending rates.
Reducing the cost of doing business is equally important, particularly by addressing unclear policies and unpredictable regulations. Government spending needs to be used more strategically, while exports should be promoted. Depositors should also be given better investment alternatives.
The banking and financial sector, meanwhile, needs to focus lending on productive sectors. Lending should be based on cash flow and a viable business plan, rather than simply against land or property ownership. Banks should use cheaper credit to help businesses expand, improve technology, increase productivity and enter new markets, rather than simply replacing old expensive loans.
At the same time, banks should not reduce lending standards simply to increase loan volumes. Cheap money should not become cheap lending. Banks need to balance loan growth, NPL risk and profitability.
The paradox, in the end, comes down to this: Nepal’s problem right now is not a lack of money. The problem is that there are not enough good and profitable places to invest it.
Lower interest rates alone cannot create demand, confidence or good investment opportunities. If this continues, people may put more money into land, gold, financial and speculative assets instead of productive businesses, while savers continue to earn less from their deposits.
Bringing interest rates down may have been the easy part. The real challenge is creating better investment opportunities, stable policies and ensuring that banks lend money to productive sectors.
