Nepal Rastra Bank (NRB) has granted banks and financial institutions an extra year to meet mandatory lending targets in productive sectors, following requests from the banking sector citing a weak economy and slow credit growth.
An amendment to the Unified Directive 2025, issued Monday, now requires commercial banks to invest 15 to 25 percent of their total loan portfolios in agriculture and micro, small, and medium enterprises (MSMEs) by mid-July 2028. The previous deadline was mid-July 2027.
Under the revised schedule, commercial banks must achieve at least 12 percent lending each to agriculture and MSMEs by mid-July 2025. Development banks and finance companies have also been given until mid-July 2028 to meet a 20 percent lending target across sectors such as agriculture, small businesses, energy, and tourism, excluding loans to disadvantaged groups.
The extension follows an appeal from chief executive officers of commercial banks and financial institutions, made during a meeting last week with NRB Governor Dr. Biswo Nath Poudel. Bankers had pointed to sluggish credit growth caused by the lingering effects of the COVID-19 pandemic, elevated non-performing loans (NPLs), and capital adequacy pressures as major hurdles to meeting the regulatory lending targets.
Under current regulations, banks are mandated to allocate 15 percent of total credit to agriculture, 10 percent to energy, 15 percent to cottage, small, and medium enterprises (CSMEs), and 22 percent to deprived sectors by mid-July 2028. The banking sector were struggling to meet these ratios within the previous deadline. The latest NRB report (as of mid-April 2025) showed that five commercial banks had already reached capital limits that prevented them from expanding lending further, with average core capital ratios at 9.52% and total capital at 12.35%, marginally down from last year.
Bank executives also raised concerns about rising NPLs, which climbed to an average of 5.05% as of mid-April, compared to 4.73% a year earlier. Eight banks are now reporting NPL ratios exceeding 5%. They had urged NRB to provide flexibility on loan provisioning and capital buffers to help facilitate further lending.
In response, NRB has introduced additional relief measures. The central bank has allowed restructuring or rescheduling of loans up to Rs 20 million in the agriculture, energy, and MSME sectors for borrowers facing financial hardship. Restructuring will require assessment of the borrower's business plan and cash flow viability, with at least 10 percent of outstanding interest recovered prior to approval. The restructured loans must be processed by mid-October 2025 and will retain their existing loan classification as of December 2024 (Poush 2081). Banks are prohibited from reversing prior loan loss provisions after restructuring.
NRB has also offered more flexibility on working capital loans. For loans disbursed prior to the issuance of the new working capital guidelines, repayment periods have been extended by two years. Banks must restructure these loans into equal periodic installments, to be recovered by the end of FY 2027. The previous deadline was FY 2025.
Since taking office on May 20, Governor Poudel has emphasized a more accommodative monetary policy aimed at supporting credit expansion and financial inclusion. In his first quarterly review, he lowered the risk weight on share-backed loans and formed a task force, headed by Rewat Bahadur Karki, to study structural challenges in the banking sector. The governor is currently holding consultations with stakeholders as part of preparations for the upcoming monetary policy for FY 2025/26.
