Chief Executive Officers of Nepal's commercial banks and financial institutions have requested additional time with the regulatory body to meet the mandatory lending requirements in priority sectors such as agriculture, energy, and small and medium enterprises (SMEs).
In a meeting with Nepal Rastra Bank (NRB) Governor Dr. Biswo Nath Poudel on Tuesday, bank leaders cited sluggish credit growth stemming from the economic slowdown and lingering effects of the COVID-19 pandemic as key challenges.
Under current regulations, commercial banks are required to allocate a minimum of 15% of the total credit to agriculture, 10% to energy, 15% to cottage, small, and medium enterprises, and 22% to deprived sectors. The existing compliance deadline for these targets is mid-July 2027. Development banks and finance companies face similar obligations, with required credit exposure of 20% to agriculture and SMEs and 15% to sectors such as energy and tourism, also by the same deadline.
During the meeting, Santosh Koirala, President of the Nepal Bankers’ Association and CEO of Machhapuchhre Bank, acknowledged that banks are unlikely to meet the required lending ratios by the mid-2025 review date. Bankers emphasized that lending to SMEs remains particularly challenging, citing higher credit risk and difficulties in recovery as primary barriers to expanding investments in that segment.
Bank executives also raised concerns about mounting capital adequacy pressures that are limiting credit expansion, despite sufficient liquidity in the system. They called on NRB to ease capital buffer requirements to facilitate greater lending capacity.
According to NRB’s latest report for the third quarter of the current fiscal year 2024/25 (till mid-April 2025), five commercial banks have already reached the regulatory limit where they cannot expand lending further due to capital shortfalls. The Capital Adequacy Framework 2015 mandates that commercial banks maintain a minimum Core Capital to Risk-Weighted Assets (RWA) ratio of 8.5% and a Total Capital to RWA ratio of 12%.
As of mid-April, commercial banks reported an average core capital ratio of 9.52% and a total capital ratio of 12.35%, slightly lower than 9.69% and 12.52%, respectively, recorded a year earlier.
Bankers also urged NRB to provide relief on provisioning requirements for non-performing loans (NPLs), as NPL levels have risen. As of mid-April 2025, the average gross NPL ratio for commercial banks had climbed to 5.05%, up from 4.73% the previous year. Eight banks now report NPL ratios exceeding 5%.
Governor Poudel, who assumed office on May 20, is currently engaging with stakeholders as part of the preparations for the upcoming monetary policy. He has also formed a committee led by Rewat Bahadur Karki to assess challenges in the banking sector. During the meeting, Poudel emphasized the need to expand credit access and directed banks to increase investments in priority sectors, even if doing so entails taking on higher risks.
