Govt’s failure to disburse subsidies forces Nepali banks to cease interest-supported loans

KATHMANDU: In a significant development, banks and financial institutions in Nepal have ceased disbursing subsidized interest loans, amounting to almost 2 billion rupees, due to the non-receipt of subsidy amounts from the last fiscal year. Despite the absence of a formal directive, experts assert that no financial institution has offered interest-subsidized concessional loans for the past few months.

Ganeshraj Pokharel, CEO of Citizens Bank, explained that the discontinuation of interest-subsidized concessional loans is attributed to the government’s failure to allocate funds for interest subsidies, coupled with the lack of regulatory directives compelling banks to provide these loans. While banks are still offering small loans at reduced interest rates using their resources, the absence of government funds has hindered the provision of subsidized interest loans.

Acknowledging the ongoing discussions with the central bank and the ministry of finance, Sunil KC, President of the Bankers’ Association, revealed that the anticipated amount for interest subsidies has yet to be received by banks. He highlighted the non-payment of approximately 10 billion rupees, pending since November of the previous fiscal year.

The Nepal Rastra Bank has repeatedly advised the Ministry of Finance regarding the unpaid amount, urging the government to settle around 10 billion rupees owed under the subsidized interest loan program. Despite quarterly requests, the money has not been received, creating a dilemma for banks and financial institutions involved in government programs.

As a consequence, more than 10 billion rupees owed to various entities, including banks, financial institutions, insurance companies, and the deposit and loan protection fund for interest subsidies, remains unpaid. This amount has accumulated over the last 13 months, causing apprehension among stakeholders and eroding public confidence in the banking sector.

The outstanding concessional loans as of mid-October 2023 amounted to 1.87 trillion rupees, serving 142,305 borrowers. Agricultural and livestock business loans constituted a significant portion, with 1.31 tillion rupees disbursed to 58,570 borrowers.

Additionally, 54.30 billion rupees were granted to 81,121 women entrepreneurs under the women entrepreneurial loans. The monthly report from the Nepal Rastra Bank revealed 2,614 borrowers with outstanding loans totaling 2.76 billion rupees under other subsidized loan categories.

Officials from the Ministry of Finance disclosed ongoing discussions with the Nepal Rastra Bank regarding the outstanding amounts owed to banks and financial institutions. They indicated that the matter is under consideration, emphasizing the need for restructuring and evaluation in the current fiscal year’s budget.

The interest subsidy concession program, initiated by the government in 2017, aimed to boost production, foster domestic employment, and promote entrepreneurship.

Despite the initial voluntary nature of the program, the Central Bank later made it mandatory for banks and financial institutions. Interest subsidies were initially provided for seven types of loans, and later expanded to ten categories, offering a 6 percent subsidy for women entrepreneurs and 5 percent for the remaining nine loan types.