KATHMANDU: Loan interest rates in Nepal’s banking sector have dropped to their lowest level in five years, creating what entrepreneurs describe as a favorable environment for borrowing. Yet, despite the cheap credit, demand for loans remains sluggish.
According to Nepal Rastra Bank (NRB), the average interest rate on loans from commercial banks stood at 8.43 percent in mid-July 2021. It climbed to 11.62 percent in 2022 and further to 12.30 percent in 2023. Since then, however, the rate has steadily declined, falling to 7.99 percent by mid-May 2025, the lowest in half a decade.
The downward trend has continued in recent months as deposit rates fell further. Several commercial banks reduced deposit rates for September as well, which will naturally push lending rates lower.
Over the past five years, deposits in commercial banks, development banks, and finance companies (excluding cooperatives) have almost doubled. Deposits increased from Rs 46.63 trillion in mid-July 2021 to over Rs 70 trillion by mid-May 2025. As of August 13, the banking sector had collected Rs 72.26 trillion in deposits while extending loans worth Rs 55.79 trillion, NRB data show.
Despite this liquidity, the credit-to-deposit (CD) ratio remains at just 76.22 percent, well below the 90 percent regulatory ceiling, reflecting subdued demand for loans.
Industry leaders say declining interest rates alone have not been enough to boost credit demand. Nepal Chamber of Commerce President Kamlesh Agrawal argues that inconsistent policies and strict rules on working capital loans have discouraged investors.
“Interest rates are important, but policy inconsistency has shaken business confidence,” Agrawal said. “The current working capital loan guidelines require companies to repay within seven days, which makes it impossible for firms without large reserves to invest in new ventures.”
He also noted that heavy investment in the stagnant real estate sector has limited liquidity for productive business activities.
Sur Krishna Vaidya, Vice-President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI), echoed similar concerns. “Although borrowing has become cheaper, working capital loan rules and sluggish real estate transactions have prevented loan demand from picking up. Construction is stalled, trade is down, and consumer demand is weak — this environment is not encouraging for new investments,” he said.
While recent monetary policy changes have eased conditions, entrepreneurs say deeper reforms are needed to restore investor confidence. Until then, analysts suggest that despite record-low interest rates, the banking sector will continue to struggle with underutilized liquidity.
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