Kathmandu: Just as Nepal stands on the verge of forming a new government backed by a historic electoral mandate, the central bank has moved ahead with significant policy changes affecting how financial resources are mobilized across the banking system.
Under the leadership of Governor Dr Bishwanath Paudel, Nepal Rastra Bank (NRB) has revised its framework on directed lending, an area that not only falls within monetary policy but also directly intersects with the government’s fiscal priorities.
The timing of the decision has drawn widespread attention. Even before the new government takes shape, the central bank has expanded the scope of priority sectors while simultaneously reducing the overall share of loans that banks must allocate to them.
Under the revised rules, lending to tourism, information technology, and industries based on domestic raw materials will now qualify as priority sector lending. At the same time, the mandatory lending threshold to agriculture has been reduced from 15 percent to 10 percent, and earlier sector-specific requirements for energy and MSMEs have been scrapped.
Instead, banks are now required to channel a combined 20 percent of their total loans into a broader basket of sectors, including energy, MSMEs, tourism, IT, and domestic raw material-based industries.
Overall, the priority sector lending requirement has been lowered from 40 percent to 30 percent. While this represents a structural shift in how credit is directed, it has also sparked debate about whether such a major policy adjustment should have been made during a political transition.
With a near two-thirds majority government expected to be formed within days, many stakeholders believe the central bank acted in haste. Critics argue that Governor Paudel may have been attempting to win the confidence of bankers and business leaders, who have long lobbied for a reduction in mandatory directed lending. Banks have often complained that being forced to allocate up to 40–45 percent of their portfolios to specific sectors limits their flexibility and profitability.
Internally, too, the move has not gone unquestioned. Some officials within the central bank reportedly advised waiting for the new government to take office, especially given that the incoming administration is expected to bring a fresh policy direction.
However, those suggestions were not heeded. The changes were introduced through a circular amending the unified directives, drawing on provisions announced earlier in the mid-term review of monetary policy conducted ahead of the elections.
This has also raised procedural concerns. Sources indicate that while the central bank’s board had discussed revisiting the priority sector lending framework, it had not explicitly decided whether the lending ratio should be reduced or increased. The inclusion of new sectors like tourism and IT had been agreed upon, but the decision to lower the overall threshold appears to have been taken at the executive level without clear board approval.
The debate goes beyond process to the broader question of coordination between monetary and fiscal authorities. Although the central bank operates as an autonomous institution, its policies, especially those related to credit allocation, are closely tied to the government’s development agenda. Governor Paudel himself has previously emphasized that monetary policy should complement fiscal policy rather than operate in isolation. Yet, in this case, the central bank moved ahead without waiting to align with the priorities of the incoming government.
This lack of coordination has fueled concerns about potential friction between the central bank and the new administration. Nepal has experienced such tensions in the past, with misalignment between finance ministers and central bank governors affecting economic management. Given the scale of the political shift following the recent elections, some fear that this early move could set the tone for a strained relationship.
Adding a political dimension to the situation is the evolving landscape of leadership. Governor Paudel was appointed under a previous coalition government, while the incoming administration is expected to be led by a different political force. Speculation about differences in economic vision, and even personal equations among key policymakers, has further intensified scrutiny of the central bank’s decision.
This has led some experts to question the rationale behind the reform. If banks are already meeting or exceeding the targets, why reduce them now?
From a policy perspective, the case for revising directed lending requirements is not entirely new. The central bank has long recognized the need to reform the framework, and internal studies have highlighted inefficiencies in the existing system.
Banks have argued that rigid lending quotas can lead to forced credit expansion, potentially affecting loan quality. The central bank has echoed these concerns, noting that penalties for failing to meet targets and the obligation to lend to specific sectors may have unintended consequences.
However, critics point out that there was no immediate urgency. The revised provisions are not set to take effect until mid-January 2027, meaning there was ample time to consult the incoming government and ensure policy alignment. Given that banks are already close to meeting existing targets, the sudden policy shift appears premature.
Data from the central bank shows that as of mid-October 2025, commercial banks had already allocated around 32 percent of their total loans to priority sectors. Agriculture accounted for over 13 percent, energy for about 9 percent, and MSMEs for more than 10 percent. With tourism and IT now added to the mix, the effective share of lending to priority areas already exceeds the newly set threshold.
This has led some experts to question the rationale behind the reform. If banks are already meeting or exceeding the targets, why reduce them now? A former senior official of the central bank argues that the focus should instead have been on addressing more pressing issues, such as capital constraints and loan classification policies, which have a direct impact on banks’ ability to lend.
On the other hand, there is also a more sympathetic interpretation of the move. Some analysts believe the central bank may be acting as a stabilizing force, anticipating the policy direction of a new government that came to power on populist promises. By easing directed lending requirements, the central bank could be trying to protect depositors’ funds and maintain financial discipline in the face of potential political pressure for aggressive credit expansion.
The historical context of directed lending in Nepal also matters. The policy was originally designed to ensure that critical sectors like agriculture, energy, and small businesses received adequate financing, especially when market forces alone failed to deliver. Over time, however, the framework became more rigid, leading to calls for reform from both the banking industry and policymakers.
In recent years, the scope of priority sectors has evolved, with tourism initially included, then removed during the pandemic, and now reintroduced alongside new sectors like IT and export-oriented industries. The latest revision reflects an attempt to modernize the framework, but its timing has overshadowed its substance.
Ultimately, the controversy highlights a deeper issue: the balance between central bank autonomy and the need for policy coordination in a developing economy. While independence is essential for credible monetary policy, decisions that shape the allocation of financial resources cannot be entirely divorced from the government’s broader economic strategy.
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