Directed Lending Sectors See Higher Bad Loans Despite Interest Subsidies

Banks have recorded higher non-performing loans (NPLs) in sectors where lending is mandatory and supported by interest subsidies, according to data from Nepal Rastra Bank (NRB). The central bank noted that slowdown in economic activity has weakened loan recovery.

An analysis of sector-wise lending by banks and financial institutions shows that fisheries have the highest level of bad loans. As of mid-July 2025, banks had extended loans worth Rs 16.26 billion to the fisheries sector, of which Rs 1.2 billion, or 9.97 percent, had turned non-performing. Five years earlier, in mid-July 2021, only 2.01 percent of loans in the sector were classified as bad loans.

Under NRB regulations, loans with principal or interest overdue by more than one year must be classified as non-performing, requiring banks to make a 100 percent risk provision.

The government had launched an interest subsidy programme in 2018 under the Interest Subsidy on Concessional Loans Procedure, offering subsidised credit to 10 priority areas, including commercial farming and livestock, self-employment for educated youth, returnee migrant projects, women entrepreneurship, Dalit business development, technical and vocational education, private housing reconstruction for earthquake victims, the garment industry, and youth self-employment. Encouraged by the subsidies, banks had increased lending to these sectors.

However, bankers say the recent economic slowdown has hurt loan recovery, pushing up NPLs, particularly in fisheries, agriculture and related sectors.

NRB data show that 7.92 percent of bank lending to the agriculture sector had become non-performing by mid-July 2025, up sharply from 1.39 percent in mid-July 2021. NRB has made agricultural lending mandatory, requiring commercial banks to channel at least 15 percent of their total loans to the sector by mid-July 2028.

After fisheries, wholesale and retail trade account for the second-highest level of bad loans. This is also the sector with the largest share of bank lending. As of mid-July 2025, banks had invested Rs 1032 billion in wholesale and retail trade, with NPLs amounting to Rs 87.92 billion, or 8.51 percent.

The construction sector, one of the hardest hit since the Covid-19 pandemic, has also seen NPLs rise to 8.40 percent. Despite NRB allowing loan restructuring and rescheduling in the sector, bad loans have not declined.

Nabil Bank Chief Executive Officer Manoj Gyawali said overall NPLs have increased due to economic slowdown, with agriculture, construction and small-scale loans being the most affected. “Large corporate borrowers can offset losses in one business with profits from another and continue servicing bank loans,” he said. “Small businesses in sectors like agriculture are more vulnerable during downturns and struggle to repay loans when operations turn unprofitable.”

Agricultural Development Bank Chief Executive Officer Govinda Gurung said the slowdown has disproportionately affected lower-income groups. “Loan recovery has weakened in agriculture as well as in small and medium-sized loans extended by banks,” he said.

NRB has also enforced mandatory lending provisions for micro, cottage, small and medium enterprises, requiring banks and financial institutions to allocate at least 15 percent of their loan portfolio to these sectors by mid-July 2028.

An International Monetary Fund (IMF) consultation report published in October 2025 warned that directed lending policies have increased risks for banks and contributed to rising NPLs. The IMF recommended making such policies more effective and time-bound in the short term and gradually phasing them out over the long run.

Similarly, a banking sector reform task force formed by NRB under the chairmanship of Dr Rewat Bahadur Karki has suggested reviewing directed lending policies, citing declining effectiveness and relevance.

Based on these recommendations, NRB has stated in its monetary policy for the current fiscal year (FY 2025/26) that it will review bank classification and provisions related to directed lending.