Cash rich, but poor

The September protests and worry about what is in store for Nepal in 2026 have added more uncertainty to a struggling economy. Real estate transactions are stagnant, industries are operating below capacity because of declining domestic demand, the construction sector is slack, and investors are in wait-and-watch mode.

In contrast, total bank deposits increased by Rs124 billion in the month before mid-October to Rs7.4 trillion. Official remittance inflows hit a record $13 billion in the past year. Nepal’s banks are flush with cash, with nowhere to put it.  

“The economy has flatlined. Non-performing assets are up, and real estate is at a standstill,” said Ashoke SJB Rana, CEO of Himalayan Bank.“There is excess liquidity in the market, with not many places to invest.”

The main reason seems to be that both domestic and foreign investors were spooked by the targeted violence of 9 September, and are so worried about the runup to elections in March that they are holding on to their wallets. Not just businesses, the political uncertainty is keeping individuals  from making big financial decisions. 

Sujeev Shakya, author of the newly-released book Nepal 2043, notes that the current doldrum is due to Nepalis playing it safe with their money.  

“People are holding on to their assets, and keeping their cash,” he says. “They are not investing in real estate, and avoiding buying gold because it is so volatile.” 

One sector in which banks have a lot of exposure is hydroelectricity, but even here recent floods have shown that this investment is increasingly at risk from climate breakdown. 

Nabil Bank, with its focus on sustainable banking, for instance, has financed 56 hydropower projects with an installed capacity of 3,000MW. 

Says Nabil CEO Manoj Kumar Gyawali: “We cannot ignore unpredictable rainfall, increased glacier melt, more frequent glacier lake outburst floods, and landslides. These risks mean that while hydropower is essential, Nepal must diversify its energy mix."   

An open secret in the banking sector is that much of the liquidity is supected laundered money. Banks also have close ownership links with big businesses, and this means that even with a slow economy, banks lend to themselves or to each other to keep transaction volumes up. 

This is one reason for a high default rate. In the first three months of this fiscal year, 4.86% of bank loans were non-performing, meaning one out of about every 20 borrowers had defaulted. A year ago, this figure was 4.04%. Banks are therefore reluctant to lend, dampening the overall investment climate.  

Ironically, the high default rate is keeping mainstream newspapers in Nepal afloat at a time when the media business is also in crisis. Even as they suffer from a massive drop in advertising revenue, most daily newspapers often add pages to fit notices to borrowers about repayment, or announcements of bank auctions of collateral property.

“While banks may be making a much smaller percentage of income compared to a few decades ago, they are still making a profit,” notes Shakya. “And so they are actually quite happy to be in this low-risk situation. Banks are conservative organisations after all.” 

Among the most striking videos of the September protests that was shared globally by tens of millions of people was the Hilton and Hyatt hotels and the Ncell building burning.

That recognisable international brands were targeted did not just cause huge losses to owners, but also damaged Nepal’s overall investment climate. Looting Bhat-Bhateni and homes of businessmen also sent a negative message, spurring capital flight. 

“That was very bad optics for potential investors, you simply worry about the security of your investment when you see things like that,” says Himalayan Bank CEO Ashoke SJB Rana. 

Nepal will graduate to Middle Income Country status next year, and donors are set to move from aid to private investment. While this could reduce misuse of money, it could dry up grants and soft loans to the health and education sectors. 

But the harm may go deeper than just the aftermath of the September events. The recent double taxation issue involving the Dolma Impact Fund, and an earlier controversy over Ncell’s capital gains tax have also put Nepal’s business climate in negative spotlight internationally. 

The banking sector is firmly on the side of investors. Says Ashoke Rana at Himalayan Bank: “This is a tax regime, it is absurd to order the payment of these taxes retrospectively. When investors see that the rules of the game can change arbitrarily, they won’t really want to put their money here. ”  

One of the positive changes in the ways Nepalis are using money is digital transactions through QR codes and mobile banking. With smartphones making up 70% of all mobile phones, QR transactions are easy and have become a part of daily life.

ONLINE BANKING 

Most businesses and ride shares have this feature on board, and people do not need to carry a lot of cash or multiple bank cards. But as digital payments become the norm, the days of free transactions may be coming to an end. 

“Right now these transactions are free for the most part. This is a subsidy by the banks, because of course, it does cost something to make sure the payments go through,” says Rana at Himalayan Bank. “However, as income decreases, banks may have to look for ways to make money, so they may charge small percentages on each QR transaction.” 

Rapid digitisation has changed not only how customers use money, but also how banks think about their offices. Himalayan Bank’s new Thamel branch, for example, has cancelled plans to redesign the office for 20 tellers. 

“We realised that people were able to do so much of what they wanted digitally that we plan to have only four tellers,” says Rana. 

But cutting down on facilities and staff has not always made for a better customer experience at some bank branches. 

Economist Sujeev Shakya conducts ghost customer experience checks for banks which involves decoys entering banks to evaluate what it is like for somebody to set up a bank account. 

The stealth missions found that standards of service have regressed, with banks having a working environment reminiscent of government offices. 

Shakya points out that the general experience of going to the bank should be much better.

“Sometimes it’s a knowledge issue -- banks may try to ask for non-disclosure contracts even when they don’t know why they want them,” he says. 

Despite digitisation, many banks still require paper-based forms and documents. Bankers and customers alike note that it feels archaic, almost absurd, to have to carry multiple copies of documents, sometimes only in Nepali lokta paper, across several family members and fill out what seems to be the same form over and over even though digital files exist.

That could soon be changing as well. As more and more Nepalis adopt the National ID, banks have adopted pilot programs that use it to create bank accounts, replacing the myriad documents that customers had to previously present to officials, making all banking transactions more efficient and less of a hassle for the customer. 

DIGITAL SECURITY

As Nepalis move their cash online, digital infrastructure needs to become more secure as well. 

Bankers spend quite a lot to make sure necessary digital security infrastructure is in place, but some banks could be using pirated software which are not trustworthy. 

There has to be better regulatory oversight to prevent phishing and fraud as online payments and digital banking spread across Nepal. 

Banks must also be innovative and ambitious. Says Shakya: “Nowhere else in South Asia are bank loans such a high ratio of the nation’s GDP.  This actually points to a well-developed financial system and we have to take advantage of it." 

Shakya also notes that many bank executives in foreign countries, like Myanmar are actually Nepali, and that banks from Nepal could use their staff and know-how to partner with or acquire banks overseas. 

While these innovations are all welcome, it is unclear how Nepal's banking sector can jumpstart economic activity in the country. Nepal’s political future looks uncertain and stability is not a guarantee. 

In the face of continuing progress in hydro electricity and the IT sector seems to be the way forward to stimulate the economy. 

The GenZ movement was a wakeup call also to financial institutions and the need for greater transparency. Nabil Bank CEO Manoj Kumar Gyawali says the September protests sent a clear message that young Nepalis want an end to corruption, good governance, and real opportunities at home: "The banking sector has a  responsibility to direct more lending toward the real economy, sectors that create jobs, build productivity, and strengthen long-term growth," he says. 

Despite a subdued investment climate, Gyawali is optimistic. "I do see early signs of improvement. Lower interest rates are beginning to restore public and business confidence. Rising remittances provide a safety net and fresh investment capacity for households," he says. "If government capital expenditure continues to improve, it will boost private sector activity."