Banking News – Headline indicators such as ample bank liquidity, falling interest rates, and comfortable reserves suggest stability in Nepal’s economy. Suvash Jamarkattel, Deputy Chief Executive Officer of Machhapuchchhre Bank Ltd (MBL), argues the picture changes once the numbers are read together.

He identifies five areas of concern: slowing growth amid rising prices, liquidity that is not becoming lending, deteriorating asset quality, skewed government spending, and heavy dependence on imports financed by remittances. Each is a problem on its own, and together they describe an economy that is stable but not productive.

1. Growth is slowing while prices rise

GDP growth eased to 3.85 percent from 4.43 percent, a drop of nearly 0.6 percentage points. Over the same period, inflation climbed to 5.14 percent by mid-July, up from 2.20 percent a year earlier. Consumer price inflation has more than doubled while output growth has weakened. Wholesale inflation, at 6.67 percent, is higher still.

The wholesale figure matters because it usually signals where retail prices are headed. When producers and traders pay more for goods, those costs tend to reach consumers with a lag. Retail inflation of 5.14 percent may therefore understate the pressure still building in the supply chain.

Slowing growth combined with rising prices squeezes households twice: incomes expand more slowly while the cost of living accelerates. For businesses, higher input costs and softer demand erode margins, which makes them less willing to borrow and invest. That feeds directly into the second concern.

2. Liquidity is not becoming lending

Deposits grew 13.9 percent, while private sector credit grew only 6.5 percent. Deposits are expanding at more than twice the pace of lending, leaving a gap of about 7.4 percentage points. Banks are collecting savings faster than they can profitably lend them.

Interest rates have fallen, and in theory cheaper money should encourage borrowing. Jamarkattel notes that this has not happened and that the money is sitting idle. The usual explanation is that the constraint is demand and confidence, not the price of credit. Entrepreneurs do not borrow simply because loans are cheap. They borrow when they expect customers, stable policy, and acceptable returns. Banks, for their part, hold back when borrowers look risky.

The result is a banking system flush with funds but short of bankable projects. Idle liquidity weighs on bank earnings, since deposits carry interest costs while the money earns little. It also signals that savings are not being converted into productive capacity, which is the main job of a financial system.

3. Asset quality is under pressure

The non-performing loan (NPL) ratio stands at 5.66 percent. On its own, that figure shows stress in loan portfolios. Jamarkattel’s concern is its pairing with weak credit growth.

He calls slow lending alongside rising NPLs a classic sign of weak real-sector demand. In a healthy expansion, credit grows and defaults stay contained because borrowers’ revenues are rising. Here the reverse is happening: lending is subdued, and the loans already on the books are becoming harder to service. Businesses are not earning enough to repay, and that is why banks are cautious about extending new credit.

This creates a feedback loop. Rising NPLs force banks to set aside larger provisions, which cuts profits and capital. Banks then lend more cautiously, which starves businesses of working capital and deepens the weakness in the real economy, which in turn produces more defaults. Breaking the cycle requires revived demand, not just regulatory forbearance.

4. The state is not spending where it counts

Government spending patterns add to the concern. Recurrent expenditure, which covers salaries, administration, and other running costs, grew 9.1 percent. Capital expenditure, which builds roads, hydropower, airports, and other assets, fell 14.8 percent.

Spending is rising on the part of the budget that creates no lasting capacity and falling on the part that creates it. Capital spending is also a major source of demand for construction, cement, steel, transport, and related industries, so a double-digit decline withdraws a key stimulus just as private demand is soft. This is a familiar pattern in Nepal, where capital budgets are routinely underspent while recurrent obligations keep climbing.

Public debt has meanwhile risen to 45.07 percent of GDP. The debt level is not alarming in absolute terms, but its quality is what matters. Borrowing that finances productive infrastructure can pay for itself through higher growth and revenue. Borrowing that largely funds running costs adds to future repayment obligations without adding to future income.

5. We import what remittances pay for

The external sector shows the structural imbalance most clearly. The trade deficit widened 16.6 percent to Rs 1,781 billion. Exports cover only 15 percent of imports, which implies imports of roughly Rs 2,100 billion against exports of about Rs 300 billion. This is an approximate figure derived from the stated deficit and coverage ratio.

Remittances fill this gap. Money sent home by Nepali workers abroad finances imports of consumer goods, fuel, vehicles, and other items. Jamarkattel is careful to say that remittances are propping up the external position but are not a growth strategy. The inflows sustain consumption and keep reserves healthy, yet they depend on the labor markets of other countries and on workers leaving Nepal, rather than on the productivity of Nepali firms.

The rupee has also weakened by about 10.9 percent against the US dollar. Because Nepal imports so much, a weaker rupee raises the domestic cost of fuel, machinery, and consumer goods, adding to the inflationary pressure described in the first point. The same weakness could in principle help exporters, but a country that exports so little is poorly placed to benefit.

Jamarkattel adds that reserves are a cushion, not a substitute for productive investment and export capacity. Healthy foreign exchange reserves buy time and protect against sudden shocks, but they do not fix the underlying dependence on imports.

What it means for banks

Jamarkattel draws a practical conclusion for the banking sector. In this environment, he says, banks need disciplined underwriting so that new loans do not add to the NPL pile. They need sector-level risk monitoring to spot stress in particular industries early, and a real push to finance productive sectors instead of parking liquidity in safe, low-yield placements.

The advice pulls in two directions. Banks must be more careful about whom they lend to, and also more active in lending to businesses that create output, jobs, and exports. Reconciling the two means building the skills to assess sector-specific risks, rather than retreating into collateral-based lending or passive holdings of idle funds.

Analysis: stable, but not yet productive

Taken together, Jamarkattel’s five points describe a coherent story. Remittances and reserves keep the external accounts steady and the banking system liquid, which is why the economy looks strong at first glance. Beneath that, private demand is weak, businesses are not borrowing or investing, loan quality is slipping, the government is spending on the wrong side of the budget, and the country produces too little that it can sell abroad.

None of this points to an imminent crisis, and the cushions he describes are real. His warning is that cushions can mask problems without solving them. Unless savings are channeled into productive investment, public money shifts toward capital formation, and export capacity is built, Nepal risks settling into low growth with persistent inflation, an economy that is financially stable but structurally stalled.