Chapter 5 · Week 5 — Money and Banking: Aggregates, Deposits and Credit
Money, Deposits and Credit
M0, M1, M2 and the money multiplier, and why in Nepal the money supply is largely determined outside the country.
Remittances arrive as bank deposits. Deposits become credit. Credit becomes spending, imports, and asset prices. This week is the machinery in the middle, and it is where the external sector meets the domestic economy.
5.1 The money aggregates
"Money" is not one thing. NRB publishes it in nested layers, each wider than the last.
┌──────────────────────────────────────────────────────────────┐ │ │ │ RESERVE MONEY (M0) — "high-powered money" │ │ currency in circulation │ │ + banks' deposits at NRB │ │ ← this is what the CENTRAL BANK directly controls │ │ │ │ ┌────────────────────────────────────────────┐ │ │ │ NARROW MONEY (M1) │ │ │ │ currency with the public │ │ │ │ + demand deposits │ │ │ │ ← money for TRANSACTIONS │ │ │ │ │ │ │ │ ┌──────────────────────────────────┐ │ │ │ │ │ BROAD MONEY (M2) │ │ │ │ │ │ M1 + time and savings deposits│ │ │ │ │ │ ← money as a STORE OF VALUE │ │ │ │ │ └──────────────────────────────────┘ │ │ │ └────────────────────────────────────────────┘ │ └──────────────────────────────────────────────────────────────┘ Each layer contains the one before it.
The 2025/26 growth rates:
Reserve money (M0) 12.06 % ████████████ Narrow money (M1) 15.71 % ███████████████▋ Broad money (M2) 11.96 % ███████████▉ Domestic credit 6.02 % ██████ Claims on private sector 8.19 % ████████
There is a story in the ordering. M1 is growing faster than M2 (15.71% vs 11.96%), which means the transaction balances are expanding faster than savings balances — money is moving out of time deposits toward accounts people can spend from. And credit is growing at half the pace of money (8.19% vs 11.96%).
THE GAP THAT DEFINES THIS YEAR
Deposits growing ~12% ████████████
Credit growing ~8% ████████
More money is arriving in the banking system than the
banking system is lending out.
Where does the difference go?
• government securities
• deposits at NRB
• and, when returns elsewhere are poor, into whatever
asset is available — which is Week 8's subject5.2 How deposits become credit — the money multiplier
A bank does not lend the note you deposited. It creates a deposit when it makes a loan, and the whole system is constrained by the reserves it must hold.
THE MULTIPLIER, IN PRINCIPLE ┌────────────────────────────────────────────────────┐ │ │ │ 1 │ │ multiplier ≈ ────────────── │ │ r + c │ │ │ │ r = required reserve ratio (CRR) [R] │ │ c = public's currency-to-deposit preference │ │ │ │ and, in practice: │ │ │ │ M2 = multiplier × reserve money │ │ │ └────────────────────────────────────────────────────┘
Worked example — recovering the multiplier from the release.
You are given growth rates, not levels, so work in growth.
Broad money M2 growth 11.96 %
Reserve money M0 growth 12.06 %
If M2 = multiplier × M0, then in growth terms:
(1 + gM2) = (1 + gMultiplier) × (1 + gM0)
1.1196 = (1 + gMult) × 1.1206
1 + gMult = 1.1196 / 1.1206 = 0.99911
gMult = −0.09 %
The multiplier was essentially UNCHANGED — it fell by
about a tenth of one percent.
Interpretation: the expansion of broad money this year came
almost entirely from the expansion of reserve money, not
from the banking system leveraging it harder. That is
consistent with credit growing slower than deposits.5.3 Where reserve money comes from — and this is the key link
Reserve money can be created two ways, and in Nepal one of them dominates.
┌───────────────────────────────────────────────────────────┐
│ SOURCES OF RESERVE MONEY │
│ │
│ NET FOREIGN ASSETS │
│ NRB buys foreign currency (remittance dollars) │
│ and pays out rupees │
│ ↑ │
│ └── THE DOMINANT SOURCE IN NEPAL │
│ │
│ NET DOMESTIC ASSETS │
│ NRB lends to government or banks │
└───────────────────────────────────────────────────────────┘
THE CHAIN, END TO END:
worker in Qatar sends USD
│
▼
bank in Nepal receives USD, credits rupees to a family
│
▼
bank sells the USD to NRB
│
▼
NRB issues RUPEES and holds the USD as RESERVES
│
├──────────────► reserves ▲ (Week 4)
│
▼
reserve money ▲ → deposits ▲ → M2 ▲
│
▼
if credit demand is weak, the money looks for another home5.4 The banking survey
The release publishes three surveys, nested the same way as the aggregates.
┌──────────────────┬──────────────────────────────────────┐
│ CBS │ Central Bank Survey │
│ Table 39-40 │ NRB's own balance sheet │
├──────────────────┼──────────────────────────────────────┤
│ ODCS │ Other Depository Corporations │
│ Table 41-42 │ the commercial banks, development │
│ │ banks and finance companies │
├──────────────────┼──────────────────────────────────────┤
│ MS │ Monetary Survey │
│ Table 37-38 │ CBS + ODCS consolidated │
│ │ ← the whole banking system │
└──────────────────┴──────────────────────────────────────┘
Each survey has the same two sides:
NET FOREIGN ASSETS + NET DOMESTIC ASSETS = MONEY
Domestic assets split into:
claims on government (net)
claims on the private sector ← the one that matters
claims on other sectorsThat identity is worth memorising, because it is the fastest diagnostic available:
IF M2 GREW AND YOU WANT TO KNOW WHY
ΔM2 = ΔNet foreign assets + ΔNet domestic assets
NFA up, NDA flat → the growth is external
(remittances, BoP surplus)
NFA flat, NDA up → the growth is domestic credit
(banks lending, or government
borrowing from the banking system)
In Nepal, in a strong remittance year, it is almost
always the first.5.5 Deposits and credit: the levels
ELEVEN MONTHS 2025/26
Total deposits Rs 6,969.99 bn
BFI credit to private sector Rs 5,481.59 bn
────────────────
Credit-to-deposit 78.6 %
For scale against the whole economy:
Deposits / GDP = 6,969.99 / 6,600.10 = 105.6 %
Credit / GDP = 5,481.59 / 6,600.10 = 83.1 %Bank deposits exceed the entire annual output of the country. That is a remarkably financialised position for a low-income economy, and it is the savings paradox from Week 1 showing up on a balance sheet: national savings of 44.8% of GDP have to sit somewhere, and in Nepal they sit in banks.
THE STOCK OF SAVINGS LOOKING FOR A RETURN
Deposits Rs 6,970 bn ████████████████████████████
Credit Rs 5,482 bn ██████████████████████
└─────────┬─────────┘
│
Rs 1,488 bn NOT lent to
the private sector
That balance sits in government paper, at NRB, and in
interbank markets — earning the low rates you will meet
next week. When those rates fall far enough, the money
starts looking for somewhere else to go.5.6 Sectoral credit — what banks actually finance
The release breaks private-sector credit down by sector, by security and by product. The structural point is what is *missing*.
THE SHAPE OF NEPALI BANK LENDING
Large shares Small shares
───────────────────── ──────────────────────
Wholesale and retail trade Agriculture
← financing imports ← most of employment
Construction and real estate Manufacturing
Consumption / personal Energy
Services
And by SECURITY, the dominant collateral is
LAND AND BUILDING.
┌──────────────────────────────────────────────────┐
│ A banking system collateralised on land is a │
│ banking system whose capital position depends │
│ on land prices. That is a concentration risk │
│ that does not appear in any single ratio, and │
│ it links the credit cycle to the property cycle │
│ mechanically. │
└──────────────────────────────────────────────────┘Trade finance being large and manufacturing small is the credit system telling you the same thing the trade data told you in Week 3: Nepal's commercial activity is dominated by moving imported goods, not making things.
5.7 Worked example — tracing a remittance rupee
Illustrative, using published aggregates.
Rs 100 of remittances arrives.
STEP 1 Family receives Rs 100, keeps Rs 20 as cash,
deposits Rs 80.
currency ▲ 20 deposits ▲ 80
STEP 2 Bank must hold reserves against the deposit. [R]
Suppose CRR-type requirements plus prudent
liquidity absorb Rs 20 of it.
lendable ▲ 60
STEP 3 But credit is growing at 8.19% while deposits
grow 11.96%. The bank cannot find 60 of good
credit demand. Say it lends 40.
credit ▲ 40
government securities / NRB deposits ▲ 20
STEP 4 The 40 lent is spent, and ~40% of Nepali
spending leaks straight back out as imports.
imports ▲ 16 ← reserves ▼
domestic demand ▲ 24
NET EFFECT
reserves +100 − 16 = +84
money supply expanded by more than 100 via the
multiplier on the 40 that was lent
the residual sits in the financial system looking
for a returnThat last line is the whole macro-financial story of Nepal in a strong remittance year, and it is the bridge to Weeks 6 and 8.
Formulas from this week
M0 = currency in circulation + bank deposits at NRB
M1 = currency with public + demand deposits
M2 = M1 + time and savings deposits
Money multiplier ≈ 1 ÷ (r + c)
= M2 ÷ M0
Multiplier growth:
(1 + gM2) = (1 + gMultiplier) × (1 + gM0)
Monetary identity:
ΔM2 = ΔNet foreign assets + ΔNet domestic assets
Credit-to-deposit = credit ÷ deposits × 100
Financial depth = deposits ÷ GDP, credit ÷ GDPWhat you should be able to do now
- Draw the nesting of M0, M1 and M2 and say what each measures.
- Explain what it means when M1 grows faster than M2, and when credit grows slower than deposits.
- Compute the change in the money multiplier from M2 and M0 growth rates.
- Trace the chain from a remittance dollar to reserve money to broad money.
- State the monetary identity and use it to attribute money growth to external or domestic sources.
- Compute credit-to-deposit and financial depth ratios and interpret them.
- Explain why land-secured lending links the credit cycle to the property cycle.
Next week: the price of all this money — policy rates, the interbank market, treasury bills, and why Nepali interest rates are where they are.
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