Kathmandu: Nepal Rastra Bank (NRB), the country’s central bank, is preparing a major review of its long-standing directed (or priority-sector) lending requirements, a policy that forces commercial banks to channel a fixed portion of their loans into specific sectors such as agriculture, small and medium enterprises (SMEs), energy, and deprived communities.
Governor Dr Bishwanath Paudel has repeatedly signalled the need for change, highlighting how the current system has sometimes pushed unsuitable loans onto farmers and small entrepreneurs, leading to defaults and even loss of land and homes. The review was formally announced in this year’s monetary policy, and an internal task force headed by a bank director is already studying the issue.
NRB spokesperson Guru Prasad Paudel confirmed that an internal committee is examining the entire framework of subsidized and priority-sector lending. “As announced in the monetary policy, we will complete the study this fiscal year and make necessary amendments,” he told reporters.
The monetary policy had promised easier agricultural financing, including allowing banks to assess crop, livestock, and farmland collateral themselves for loans up to Rs 1 million (around US$ 7,400). It also pledged simpler procedures for crop-specific and seasonal agricultural loans, as well as better monitoring of implementation.
Additional incentives were introduced for hotels and restaurants along the Postal Highway and Mid-Hill Highway that meet food-safety standards, and for businesses near major market centres along these roads. Loans up to Rs 30 million (about US$ 222,000) to such enterprises will continue to count toward banks’ SME lending targets.
Yet despite these facilitations, serious concerns have emerged about asset quality. Banks complain that pressure to meet rigid targets has forced them to extend credit to borrowers who lack the capacity to repay, particularly in agriculture and micro, small, and medium enterprises (MSMEs). Non-performing loans in these mandated sectors are significantly higher than in others.
Governor Paudel, who personally travelled along the Mid-Hill Highway before finalizing the monetary policy and is currently touring eastern Nepal, has heard firsthand accounts from farmers and branch managers. Many say that in the rush to hit targets, loans often go to well-connected individuals who fabricate paperwork rather than to genuine farmers. In extreme cases, borrowers who never intended to farm end up defaulting, and their collateral—often their only plot of land—is auctioned off.
The directed lending system is not new. Introduced in 1974 at 5 percent of total lending, it peaked at 40 percent in the early 1990s before being gradually phased out starting 2002–03 as Nepal embraced more liberal economic policies. International experience in countries such as China, Russia, India, Venezuela, Argentina, and Zimbabwe showed that heavy-handed directed lending often distorted credit markets and discouraged foreign investment.
The policy was controversially revived in 2011–12 under then-Governor Dr Yubaraj Khatiwada, who set a 20 percent priority-sector target. Subsequent governors raised it progressively: to 25 percent, then 36 percent, with a roadmap to reach 45 percent by 2027–28 (15 percent each to SMEs and agriculture, 10 percent to hydropower, and 5 percent to deprived sectors).
A senior NRB official admitted that both international best practices and the negative impact on banks’ balance sheets are being closely studied. “Banks have been complaining that forced lending into agriculture and MSMEs has hurt their asset quality. We are looking at everything—global models, actual outcomes here, and the risks to depositors’ money,” the official said.
The same source indicated that the review, expected to be completed by the third quarter of the current fiscal year, is likely to move “backward rather than forward.” While the system will not be scrapped entirely, the list of priority sectors could be broadened or the mandatory percentages reduced.
Newly transferred Executive Director Revati Prasad Paudel has instructed his team at the Bank Supervision Department to fast-track research on international practices, emerging problems, and asset-quality deterioration caused by directed lending.
Bankers privately acknowledge a two-tier reality: large, well-connected businesses routinely secure loan rescheduling and other relief, while small borrowers without political access see their collateral seized quickly when they default.
Governor Paudel has stressed in public forums that instead of forcing credit expansion, policy should focus on building the repayment capacity of ordinary citizens and entrepreneurs—an area where fiscal policy, not just monetary tools, must take the lead.
With the central bank now penalizing institutions that miss priority-sector targets—a punishment that also dents reputation—banks have often prioritized hitting numbers over credit quality. Officials say the upcoming changes aim to strike a better balance between promoting key sectors and protecting the stability of the banking system and depositors’ savings.
Field visits by the governor and detailed internal studies will form the basis for final recommendations, with changes expected before the end of the current fiscal year.
Comment Here