Efforts by Nepal Rastra Bank (NRB) to expand credit access to lower-income groups through mandatory lending requirements appear to be faltering, as most commercial banks have failed to meet targets for loans to micro, cottage, small, and medium enterprises (MSMEs).
According to NRB guidelines, commercial banks were required to allocate at least 12% of their total loan portfolio to MSMEs by the end of the current fiscal year 2024/25 (mid-July 2025). However, as of mid-April, only about six banks surpassed the mandated threshold, while five others were close. The majority of banks remained below the target.
NRB data shows that, on average, commercial banks invested 10.92% of their total credit in MSMEs by mid-April, up from 9.43% a year earlier. Despite a slight improvement, the sector remains underfunded compared to the central bank’s long-standing mandate.
NRB first introduced the requirement in fiscal year (FY) 2019/20, setting a phased timeline for banks to gradually increase their lending to MSMEs. The target was set at 11% by July 2021, 12% by 2022, 14% by 2023, and 15% by 2024. However, due to consistent non-compliance, the deadlines have been repeatedly extended. Under the latest unified directive, the target is reset to 11% by 2024, 12% by 2025, 14% by 2026, and 15% by 2027.
Government-owned banks, Agricultural Development Bank, Rastriya Banijya Bank, and Nepal Bank, have made comparatively higher allocations to MSMEs. Among private institutions, only NIC Asia Bank and Kumari Bank meet the current year’s target. Several others, including Machhapuchchhre, Global IME, Siddhartha, Citizens, and Everest Bank, are nearing compliance.
To encourage broader financial inclusion, NRB allows banks to count loans under Rs 20 million and direct lending to low-income borrowers toward the MSME quota. These loans are expected to prioritize industries based on domestic raw materials.
Bankers argue that sluggish economic activity, particularly in the wake of the COVID-19 pandemic and ongoing recessionary pressures, has disproportionately affected small and medium enterprises. A senior banker, speaking on condition of anonymity, stated that weak repayment capacity and elevated credit risk make it difficult to meet NRB’s lending targets. “Despite regulatory pressure, the market environment is not conducive to ramping up credit flow to MSMEs,” the banker said.
Last year, lobbying by the Nepal Bankers’ Association led to a further extension of the compliance timeline for mandated lending in agriculture, hydropower, and MSME sectors.
Failure to meet the lending quotas within the designated time frame carries financial penalties. NRB mandates that banks falling short must pay a quarterly penalty equivalent to the interest income they would have earned, calculated using the highest interest rate they charge on loans, on the shortfall amount.
Speaking at a meeting of the Finance Committee of the Federal Parliament in late May, the then NRB Governor Maha Prasad Adhikari highlighted the skewed distribution of credit in the banking system. He revealed that just 0.01% of borrowers account for 3.9% of the total lending volume, underscoring the concentration of credit among a handful of elites.
