Kathmandu Valley aquifer in central Nepal is continuously under stress since the commencement of mechanized extraction of groundwater resources in early 1970s. Many wells have been drilled in shallow and deep aquifers of the valley; and numerous studies have been made in last four decades to understand the aquifers. However, up-to-date information on well inventory, water extraction, water quality and overall situation of groundwater environment are not yet known in the absence of institutional responsibility in groundwater management. This study attempts to evaluate current state of the groundwater environment considering natural and social system together; to better understand origin of stresses, their state, expected impact and responses made/needed to restore healthy groundwater environment. The analysis reveals increasing population density (3,150–4,680 persons/km2), urbanization (increase in urban population from 0.61 to 1.29 million) and increasing number of hotels due to tourism (23–62 hotels) during a decade are acting as driving forces to exceed groundwater extraction over recharge (extraction = 21.56 and recharge = 9.6 million-cubic meter-a-year), decrease in groundwater levels (13–33 m during 1980–2000 and 1.38–7.5 m during 2000–2008), decline in well yield (4.97–36.17 l/s during mid-1980s to 1998) and deterioration in water quality. In the absence of immediate management intervention with institutional responsibility for groundwater development, regulation and knowledgebase management (i.e. to facilitate collection, integration and dissemination of knowledge); situation of groundwater environment are expected to deteriorate further. Groundwater modeling approach may help to suggest appropriate management intervention under current and expected future conditions.