Fiscal Nepal
First Business News Portal in English from Nepal
KATHMANDU: Nepal Rastra Bank has introduced a significant regulatory relaxation allowing banks and financial institutions to assign a lower risk weight of 60 percent on loans up to Rs 30 million extended to small and medium enterprises (SMEs), in a move aimed at accelerating credit flow to key productive sectors.
The new provision, incorporated through amendments to the Capital Adequacy Framework 2015 and earlier 2007 framework, applies specifically to SMEs operating in agriculture, information technology, and manufacturing sectors.
According to the circular, banks can apply the reduced risk weight only if strict conditions are met. These include mandatory guarantees from the Deposit and Credit Guarantee Fund or full collateralization through land and buildings with at least a 25 percent margin on fair market value. Additionally, the loans must be covered by project insurance, ensuring a layer of risk mitigation.
The central bank has also updated reporting formats related to risk-weighted exposure and eligible credit risk mitigants, formally integrating SME loans under the revised prudential framework.
Strategic Shift Toward Productive Lending
This policy signals a calibrated shift by NRB to incentivize banks toward lending in sectors that directly contribute to economic productivity and import substitution. By lowering the risk weight, banks will require less capital to back such loans, effectively making SME financing more attractive from a balance sheet perspective.
Banking analysts interpret the move as a targeted intervention to address the persistent credit slowdown in Nepal’s real sector, particularly at a time when industries have been facing liquidity constraints and high borrowing costs.
Balancing Growth with Risk Controls
Despite the relaxation, NRB has embedded tight safeguards. The requirement for guarantees, strong collateral margins, and insurance coverage indicates that the regulator is attempting to strike a balance between credit expansion and financial stability.
The inclusion of SME loans in detailed capital adequacy reporting formats also suggests heightened regulatory monitoring, ensuring that banks do not misuse the relaxed provisions for aggressive or risky lending.
Implications for Banks and Borrowers
For commercial banks, development banks, and finance companies (Class ‘A’, ‘B’, and ‘C’ institutions), the directive opens a window to rebalance their loan portfolios toward SMEs without significantly increasing capital pressure.
For SMEs, particularly in agriculture, IT, and manufacturing, the policy could translate into improved access to credit, potentially at more favorable terms, as banks gain regulatory incentives to expand lending in these segments.
The circular underscores NRB’s broader intent to align financial sector policies with Nepal’s economic recovery priorities, focusing on domestic production, employment generation, and sustainable growth.
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