NPL in agriculture and SME loans hits 9pc in Nepal: Bankers urge NRB to revisit compulsory lending policy

KATHMANDU: The Non-Performing Loan (NPL) ratio in Nepal’s agricultural and Small and Medium Enterprises (SME) lending has surged past 9 percent, raising serious concerns among bankers and financial experts. The issue intensified after Nepal Rastra Bank (NRB) penalized Standard Chartered Bank Nepal with a fine of NPR 148.5 million for failing to meet mandatory lending targets in the productive sectors, including agriculture, energy, and SMEs.

The regulatory action, taken during the second quarter of fiscal year 2081/82 BS (ending mid-January 2025), has sent shockwaves across the banking sector. Under the current NRB directive, banks are required to channel a specific percentage of their total lending into priority sectors. Failure to meet these mandatory thresholds results in heavy fines and regulatory penalties.

Bankers are now expressing deep concern over this binding provision. According to Santosh Koirala, President of the Nepal Bankers’ Association (NBA), most defaults are now emerging from priority sectors like agriculture, hydropower, and SMEs—the very sectors banks are being compelled to finance.

“The NPL in agriculture has exceeded 9%, and it’s over 8.5% in SMEs,” said Koirala. “This data itself makes the problem very evident. We must stop debating the source of the issue and instead focus on resolving it through the upcoming monetary policy.”

Forced Lending Creating Systemic Risk

Former NBA President Gyanendra Dhungana echoed similar concerns, emphasizing that directive lending has become the most troubled segment in the banking industry. “To avoid fines, banks are hastily disbursing loans in sectors where the risk is unmanageable. Many of these businesses have shut down or are operating at minimal capacity,” Dhungana warned.

He emphasized that the compulsory lending policy must be reevaluated. “Banks have grown significantly—some exceeding NPR 600 billion in assets, heading towards NPR 1 trillion. Yet, the mandatory lending percentages remain fixed, which is unrealistic in a stagnant market.”

Dhungana also noted that while fines may not directly threaten bank stability, non-compliance damages their international reputation, especially with correspondent banks and global stakeholders.

“When a bank pays penalties, it must explain why it failed to comply, often to hundreds of partners and regulators. Compliance becomes a burden when banks are forced to lend without proper risk assessments.”

Economists and Bankers Seek Policy Overhaul

Economist Dr. Nara Bahadur Thapa strongly criticized the government and NRB’s approach, accusing them of delegating responsibilities they themselves cannot manage. “Asking commercial banks to invest in agriculture or SMEs without structural support is unrealistic. Penalizing Standard Chartered Bank, a major correspondent bank player post-FAFT action, is utterly absurd,” he said.

Former NBA President Bhuvan Dahal pointed out that such blanket policies ignore institutional specialization. He recommended allowing banks to buy and sell priority sector lending quotas, based on their core competencies.

“Agriculture Development Bank has expertise in farming loans; Sanima Bank is strong in energy financing. A flexible buy-sell mechanism would benefit the whole economy,” said Dahal. “Standard Chartered tried to do this, but was still penalized. That’s not just unfair—it’s counterproductive.”

NRB Governor Acknowledges Policy Challenge

NRB Governor Dr. Bishwanath Paudel acknowledged the growing risks in agriculture and SME lending. “The NPL ratio is increasing, particularly in loans ranging from NPR 2 to 5 crore. While the directive lending policy was intended to promote long-term economic growth, we must admit that the sector’s performance has been problematic.”

Governor Paudel suggested that NRB will consider collective stakeholder feedback before crafting future policy reforms. “We’re hearing from all sides and hope to forge a common policy path.”

Policy Backfiring on Its Own Goals

Although the directive lending policy was designed to fuel long-term growth in key sectors like agriculture and SMEs, bankers now say it is backfiring. High production costs, lack of market modernization, and limited access to risk mitigation have made these sectors unattractive for investment.

“NRB’s mandate of lending up to NPR 20 million in the SME segment has now turned into the most NPL-hit zone,” said Dhungana. “The agricultural sector, too, suffers from high production costs and pricing volatility.”