Despite Nepal Rastra Bank prioritising agricultural loans, the investment in this sector by banks and financial institutions has started to decrease. BFI’s credit flow to this sector has been adversely affected due to the the suspension of concessional interest for agricultural loans and the increasing number of youths migrating abroad.
According to a report published by the central bank, loan disbursement to the agricultural sector has decreased as of mid-October in the current fiscal year (FY 2024/25). While loans in sectors such as mining, productive sector industries, construction, wholesale and retail trade, service industries, and consumables have increased, agriculture has seen a decrease of 0.4%.
As of the end of the previous fiscal year (FY 2022/23), banks and financial institutions had disbursed Rs 418.17 billion in agricultural loans, but by mid-October 2024, the credit flow to this sector reduced by 0.4% or Rs 1.56 billion to Rs 417 billion. However, compared to mid-October of the previous year, agricultural loans from banks have increased by 0.16%. In the corresponding period of previous year, banks had disbursed Rs 416.35 billion in agricultural loans.
Nepal Rastra Bank has been pushing to increase the flow of loans in the agricultural sector. According to the central bank’s directives, commercial banks must channel at least 15% of their total loans into agriculture by mid-July 2027. For the previous fiscal years, the thresholds set were 11% by mid-July 2024, 12% by mid-July 2025, and 13% by mid-July 2026.
Previously, the deadline for meeting the specified target was set for mid-July 2023, but the central bank extended the timeline due to the COVID-19 pandemic. Despite the extended deadline, banks have started to reduce agricultural investments instead of increasing them as per the directive.
Banks, however, claim that the cessation of concessional interest loans and the lack of demand for agricultural loans in the market have hindered their investment.
"Merely issuing directives from the central bank will not increase agricultural loans," said the CEO of one bank requesting anonymity. "The government must create an environment that attracts youths to agriculture, and only then will investments naturally increase."
The CEO also pointed out that the increase in youth migration abroad and the stoppage of concessional loans are key factors for this situation. Since the banks and financial institutions have not received interest subsidies from the government, they have not been offering concessional loans since last year.
Dr. Gunakar Bhatta, executive director of the Research Department of Nepal Rastra Bank, also acknowledged that the increased migration of youths abroad could be impacting agricultural loans. "The increased migration of youths might be leading to a reduced demand for agricultural loans," he said.
According to Nepal Rastra Bank, compared to mid-July of the previous fiscal year, the overall credit flow of banks has increased by Rs 128.65 billion, or 2.5% in mid-October. Meanwhile, credit flow up to mid-October this year increased by 6% compared to the corresponding previous of last fiscal year.
Similarly, as compared to mid-July of the previous fiscal year, the deposits of banks have increased by 2.6% as of mid-October this year. The report of the central bank mentions that the year-on-year deposit growth compared mid-October of the previous year stood at 12% this year.
Additionally, due to high remittance inflows, the external sector indicators of the economy have strengthened further. As of mid-October 2024, remittance inflows have increased by 11.5% to reach Rs 407.31 billion. Consequently, the current account is in a surplus of Rs 111.87 billion. Furthermore, the foreign exchange reserves have increased by 9.4%, amounting to Rs 2232 billion, according to the latest report of NRB.
