Amid growing concerns that credit flow of banks in Nepal is not translating into meaningful economic development, Nepal Rastra Bank (NRB) has signaled that its upcoming monetary policy will prioritize lending to productive sectors, particularly agriculture and small and medium-sized enterprises (SMEs). Speaking at formal events on Sunday, NRB Governor Dr Bishwo Nath Paudel acknowledged challenges in these sectors but emphasized the need to push forward despite short-term difficulties.
During a pre-monetary policy discussion organized by the Society of Economic Journalists-Nepal (SEJON), Governor Poudel said that while lending to agriculture and SMEs had been encouraged, these sectors have shown higher levels of non-performing loans (NPLs). Nevertheless, he asserted that elevated NPLs should not deter further investment, noting that increased credit to agriculture and micro, small, and medium enterprises (MSMEs) remains essential.
Governor Poudel also indicated a broader approach to evaluating banks, moving beyond traditional metrics based solely on financial statements. He noted that future assessments would consider banks' contributions to the national economy. He reiterated this point during a parliamentary Finance Committee meeting, where discussions are ongoing regarding a potential overhaul of how financial institutions are classified.
Currently, Nepal’s banks and financial institutions are categorized into four tiers—Class A, B, C, and D—but in practice, these institutions often perform overlapping functions. Poudel highlighted that the primary distinction between Class A and B institutions is the authorization to open letters of credit (LCs), suggesting that a new classification framework is under serious review.
In parallel, debate is intensifying over proposed amendments to the Bank and Financial Institutions Act (BAFIA), which seeks to enforce a stricter separation between bankers and business owners. Several lawmakers, including Rajendra Kumar KC and Bhagwati Chaudhary, questioned the urgency of this provision during Sunday's Finance Committee session, arguing that its necessity remains unclear.
The proposed amendment defines individuals holding more than 1% of a financial institution’s shares as having significant ownership. It prohibits such individuals and their close family members from obtaining loans from any bank or financial institution. Defending the provision, NRB Executive Director Guru Prasad Paudel said that those with substantial shareholding now hold increased influence due to capital expansion in the banking sector, justifying stricter lending restrictions.
