Fiscal Nepal
First Business News Portal in English from Nepal
KATHMANDU: Banks and financial institutions in Nepal are grappling with a surge in non-performing loans (NPLs) in the agriculture and small and medium enterprise (SME) sectors, with nearly 9% of such loans classified as bad debt by the end of March 2025, according to Nepal Rastra Bank (NRB) officials. This rate, almost double the overall banking sector’s average NPL of 5.24%, has raised alarms and prompted the central bank to focus on addressing the issue.
In the current fiscal year, banks have disbursed NPR 5.535 trillion in total loans by March, but the high default rate in agriculture and SME lending has become a significant concern. “The NPL ratio for agriculture and productive sectors is around 9%, nearly twice the banking sector’s average,” an NRB official said. “This has led us to initiate steps toward establishing an asset management company to tackle the problem.” The elevated default rate is discouraging domestic production, a point emphasized by newly appointed NRB Governor Prof. Dr. Bishwanath Paudel during a recent parliamentary Finance Committee meeting.
Governor Paudel, who assumed office less than a month ago, has launched a study to investigate why agriculture and SME loans are turning sour. He identified two primary reasons: deliberate non-repayment by borrowers and a lack of business education among loan recipients. “Banks don’t provide basic business knowledge when disbursing loans, and there’s no practice of educating farmers on commercial farming,” Paudel noted. He is currently reviewing loan performance in the Mid-Western region.
To boost domestic production, employment, and self-employment, the NRB mandates that commercial banks allocate at least 15% of their total loans to agriculture and another 15% to SMEs (loans under NPR 20 million, including microfinance) by June 2027. Development banks and finance companies are required to channel 20% and 15% of their loans, respectively, to agriculture, micro-enterprises, energy, and tourism, prioritizing industries using local raw materials.
By December 2024, commercial banks had allocated 11.76% of their NPR 4.816 trillion total loans (NPR 662.76 billion) to agriculture and 11.24% (NPR 541 billion) to SMEs. Development banks directed 26% of their NPR 512 billion loans (NPR 133 billion) to mandated sectors, while finance companies disbursed NPR 20 billion to these areas. However, an NRB study revealed misuse of subsidized loans in these sectors, exacerbating the bad debt problem.
The high NPLs in agriculture and SMEs threaten financial stability and domestic production goals, prompting calls for improved loan screening, borrower education, and stricter oversight to curb defaults.
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