Nepal Rastra Bank (NRB) has decided to push banks to lend more to farms, factories and small businesses instead of focusing mainly on consumption loans. In its mid-term review of the Monetary Policy for 2025–26, the central bank revised the mandatory credit ratio for priority sectors and expanded lending limits for agriculture, energy, and micro and cottage industries. It has also brought tourism, information technology and export-based businesses that use local raw materials under this focus. By mid-January of the current fiscal year, banks and financial institutions had disbursed Rs 1.261 trillion in consumption loans. Loans to agriculture, forestry and production activities stood at Rs 965.25 billion. That gap reflects a structural bias. Even with excess liquidity pushing interest rates down, banks have preferred retail and consumption lending. At the same time, NRB kept the interest rate corridor, bank rate, cash reserve ratio and statutory liquidity ratio unchanged. In short, while the central bank has not altered its macroeconomic stance, it has signalled a clear shift in credit allocation. This shift is long overdue.
Lending slows as banks focus on recovery of loans at fiscal yea...
When banks choose consumption over production, they prioritise quick returns over long-term growth. Consumer loans are easier to process. The collateral is often urban property, and the repayment cycle is predictable. Production loans require greater due diligence, involve longer gestation periods and demand closer monitoring. They also carry risks stemming from unreliable power supply, logistics constraints and policy delays. Faced with these realities, banks have behaved as rational, profit-seeking institutions, lending where recovery is easier. But the economy pays the price. Consumption-driven credit fuels imports, widens the trade deficit and drains foreign exchange reserves. Production-driven credit, by contrast, builds capacity. It creates jobs, supports exports and reduces import dependence. If Nepal wants to narrow its external imbalance and generate decent employment at home, it cannot rely primarily on personal loans and hire-purchase schemes. The central bank’s review also includes measures to facilitate foreign direct investment in emerging sectors such as data centres, cloud computing, robotics laboratories and artificial intelligence. It plans to promote credit flow to such projects, particularly under co-financing models. The ceiling for primary capital on non-deliverable forward transactions has been raised. Regulations on working capital loans have been relaxed, allowing banks to determine repayment periods. Borrowers can now maintain a sanctioned limit of up to 30 percent of the outstanding loan amount, up from 10 percent.
These are not cosmetic changes. They offer greater flexibility and could ease cash-flow pressures on firms. Business leaders have welcomed the move. Nepal Chamber of Commerce President Kamlesh Kumar Agrawal has called it a positive step. He sees potential in digital infrastructure and technology-driven sectors to attract foreign capital and has also appreciated the provision for restructuring and rescheduling loans for firms affected by infrastructure projects. Still, policy announcements do not automatically translate into credit on the ground. The deeper issue lies in incentives. Banks respond to risk-adjusted returns. If lending to agriculture or small manufacturing remains administratively burdensome and legally risky, they will meet the minimum requirements and stop there. To make this shift meaningful, the government must reduce structural bottlenecks, speed up project approvals, improve contract enforcement and ensure reliable energy and transport networks. The central bank has done its part by nudging credit towards production without disturbing macroeconomic stability. Now the burden shifts to banks to look beyond short-term profits and to policymakers to improve the investment climate. Credit policy can redirect the flow of money; only sustained reform can turn that flow into lasting growth.
