Most Banks Fall Short of SME Lending Target

Most commercial banks have failed to meet the lending threshold set by Nepal Rastra Bank (NRB) for micro, cottage, small and medium enterprises (MSMEs), despite a regulatory deadline that has already passed.

Under NRB provisions, commercial banks are required to channel at least 11 percent of their total loan portfolio into MSMEs by the end of mid-July 2025 (end of fiscal year 2024/25). However, even three months after the close of the fiscal year, only six banks have met the requirement.

NRB data show that as of mid-October 2025, commercial banks had, on average, invested 10.48 percent of their total loans in MSMEs. Although higher lending by state-owned banks has lifted the overall average, 14 commercial banks remain below the mandated 11 percent threshold.

Only state-owned banks—Rastriya Banijya Bank, Agriculture Development Bank and Nepal Bank Limited—along with NIC Asia Bank, Kumari Bank and Global IME Bank have complied with the lending requirement.

As per NRB rules, loans of up to Rs 20 million, as well as direct lending to low-income groups, qualify as MSME credit. Banks are allowed to charge interest rates on such loans by adding a premium of up to 2 percentage points above their base rate.

NRB spokesperson Guru Prasad Paudel said banks have struggled to meet priority-sector lending targets in recent years due to an overall slowdown in credit growth.

“We fixed minimum thresholds for MSME lending based on projected private-sector credit flow,” he said. “However, weak credit demand across the economy has made it difficult for banks to invest as required.”

Paudel said the central bank currently assesses banks’ investments across all priority sectors collectively and imposes penalties only if the overall requirement is not met.

NRB has mandated commercial banks to channel 40 percent of their total lending into priority sectors—15 percent each for agriculture and MSMEs, and 10 percent for energy. Citing sluggish credit growth, the central bank extended the compliance deadline by one year, pushing it to mid-July 2028.

Although the central bank has long adopted a directed lending policy to channel credit into productive sectors and reach low-income groups, international institutions, experts and bankers have repeatedly called for reforms.

In an advisory report published in October 2025, the International Monetary Fund (IMF) warned that directed lending could increase risks and non-performing loans in banks, recommending that the policy be made more effective in the short term and gradually phased out over the long run.

A banking sector reform task force formed by NRB under the chairmanship of Dr Rewat Bahadur Karki has also recommended a gradual withdrawal of directed lending programmes. Reflecting these concerns, NRB stated in its monetary policy for fiscal year 2025/26 that it would review the limits and structure of directed and deprived-sector lending.

During an NRB consultation programme held in the third week of December, bankers again criticised the mandatory nature of directed lending. Ashoke Rana, chief executive officer of Himalayan Bank, said commercial banks lack sectoral expertise in areas such as agriculture and MSMEs and suggested moving towards a specialised banking model.