Kathmandu: Nepal Rastra Bank (NRB) is preparing to revise its existing framework on directed lending and credit loss provisioning, with an internal study now in its final stage.
A committee led by the director of the Bank and Financial Institutions Regulation Department has completed most of its review, and preliminary findings suggest extending the period before loans to priority or designated productive sectors are classified as non-performing, according to sources familiar with the process.
The central bank had already announced in its current fiscal year’s monetary policy that it would study and review priority sector lending, loan classification, and credit loss provisioning. In line with that commitment, an internal study committee was formed under the coordination of department director Devendra Gautam. Based on international practices and Nepal’s domestic needs, the committee has prepared an initial report and begun discussions at higher policy levels.
According to central bank sources, the review covers not only loan classification and provisioning but also the broader framework of directed lending. Nepal Rastra Bank has indicated that policy refinements will draw in part on the experiences of neighbouring countries such as India and Bangladesh. However, officials stress that the goal is not a blanket overhaul of all loans. Instead, the bank is considering differentiated rules based on the nature of loans and the sectors they support, while also redefining what constitutes productive and priority-sector lending.
Although different directives govern these areas within the unified regulatory framework, they are closely interconnected. The central bank says it is working to complete the review and begin implementation within the third quarter of the current fiscal year, as outlined in the monetary policy. That policy explicitly stated that existing loan classification and credit loss provisioning arrangements would be studied and revised as necessary.
The monetary policy had also flagged the need to reassess the mandates of certain banks and financial institutions and to review lending policies for agriculture and micro, small, and medium enterprises. It noted that some institutions were created to address past challenges that may no longer be relevant, and that financial resources have not been mobilized as effectively as expected in state-priority sectors. As a result, a detailed study was promised to reassess institutional classifications and operational scopes.
In addition, the monetary policy announced reforms aimed at improving access to credit for agriculture and MSMEs, with the broader goal of raising the living standards of low- and middle-income households. It allows banks and financial institutions to independently value agricultural crops, farmland, and agribusiness structures as collateral and to extend agricultural or business loans of up to Rs 1 million.
The ongoing study is examining whether a more sector-based approach—similar in principle, though not identical, to India and Bangladesh—could be adopted in Nepal.
For such loans, only minimal credit loss provisioning would be required during the grace period. The policy also seeks to simplify lending for activities related to crops, livestock, poultry, fisheries, and other agricultural businesses, aligning loan tenures and structures with production cycles while strengthening monitoring of implementation.
Central bank officials say the current system tends to treat loan classification and provisioning as a single, uniform framework. The ongoing study is examining whether a more sector-based approach—similar in principle, though not identical, to India and Bangladesh—could be adopted in Nepal. While Nepal cannot replicate India’s highly flexible system, there is discussion about revisiting the rule that classifies loans as non-performing after one year of overdue payments with a requirement for 100 percent provisioning. For certain sectors, extending this threshold to 18 months or even two years is under consideration.
To support such changes, officials say priority-sector lending itself must be redefined, taking into account national needs, productive capacity, and sectoral contributions to the economy. Information technology, they note, is no longer just another industry but a national priority and should be included, though a clear distinction must be made between IT service exporters and businesses focused on importing and selling hardware such as computers and mobile phones. Similar challenges exist in defining how hotel and tourism-related activities should be treated.
The central bank is therefore looking to refine definitions within MSMEs, first categorizing loan sectors more clearly and then adjusting loan classification and credit loss provisioning policies accordingly. While India’s system may be too liberal for Nepal to adopt wholesale, policymakers are discussing whether sectors such as domestic raw-material-based manufacturing, agriculture, MSMEs, and IT exports should be given more time before loans are labeled as non-performing. Additional facilitation, including grace periods for agriculture and MSME loans, is also being considered.
Although some revisions were made to energy-sector lending in the past year, officials acknowledge that many loans are still governed by older definitions. They say loan sectors and scopes will be updated based on current conditions, and corresponding classification and provisioning rules will be applied accordingly.
Under existing regulations, loans that are current or overdue by up to one month, loans backed by fixed deposits, government securities, or NRB bonds, and gold and silver loans of up to Rs 1 million per customer with adequate collateral are classified as performing. Loans overdue by one to three months, or short-term and working capital loans not renewed within a month or temporarily extended for up to 90 days, fall under a “watch list.” Within non-performing loans, those overdue by three to six months are classified as substandard, six months to one year as doubtful, and more than one year as bad loans.
Provisioning requirements currently stand at 1 percent for performing loans, 5 percent for watch-list loans, 25 percent for substandard loans, 50 percent for doubtful loans, and 100 percent for bad loans. Nepal Rastra Bank is now preparing to adjust these provisioning rates based on sector-specific considerations.
At present, banks and financial institutions are required to extend 5 percent of their total lending under directed lending provisions. By mid-July 2029, they must allocate 15 percent of lending to agriculture, 15 percent to MSMEs, and 10 percent to the energy sector. Alongside revising loan classification and provisioning rules, the central bank plans to redefine and reassess priority-sector lending requirements as well.
Nepal currently follows Expected Credit Loss guidelines to calculate loan losses. After ECL implementation, calls grew to remove or relax aging-based provisioning rules. In response, the central bank reaffirmed in its monetary policy that existing loan classification and credit loss provisioning frameworks would be reviewed and revised as needed, a process that is now nearing completion.
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