Why Has Agricultural Lending Declined?

Despite Nepal Rastra Bank (NRB) prioritizing agriculture sector lending, credit flow to the sector from banks and financial institutions has started to decline.

Agriculture sector lending started declining after banks stopped providing concessional loans for agriculture and other sectors, while demand for agricultural loans also dropped. As a result, the growth rate of agricultural lending has turned negative.

According to NRB data, agricultural loans from banks and financial institutions decreased by 0.2 percent in Fiscal Year (FY) 2024/25. Until FY 2023/24, banks had disbursed Rs 418.59 billion to the agriculture sector, but the amount dropped by Rs 700 million to Rs 417.88 billion in FY 2024/25.

Sector-wise, loans increased in productive sector industries, construction, wholesale and retail trade, service sector, and consumption, while agriculture and mining were the only sectors to witness a decline.

Banks attribute the slowdown to the suspension of concessional loans in the segment and reduced demand for agricultural credit.

“NRB directives alone cannot boost agricultural lending,” said a CEO of a commercial bank. “The government has failed to provide promised interest subsidies. Forcing banks without ensuring returns will not work.” He added that difficulties in recovering agricultural loans and rising non-performing loans have also discouraged banks.

Banks and financial institutions have not provided subsidized loans for the past 18 months due to the government’s failure to release interest subsidies. Consequently, the outstanding volume of concessional loans has continued to decline.

NRB had introduced mandatory provisions requiring banks to allocate a certain percentage of credit to agriculture, along with incentives for concessional loans.

The original deadline for commercial banks to allocate at least 15 percent of their total loans to agriculture was mid-July 2023, which was later extended to mid-July 2027 due to the COVID-19 pandemic. Most recently, NRB further extended this deadline to mid-July 2028.

NRB officials claim they are working to encourage investment in agriculture. “Recently, the biggest challenges have been seen in agriculture as well as small and medium enterprises,” said a director at NRB. “We have provided facilities such as deadline extensions, restructuring, and rescheduling to support lending.”

On Sunday, NRB issued a directive allowing banks to provide up to Rs 1 million in agricultural loans against collateral of agricultural produce, arable land, or agricultural infrastructure, assessed by the banks themselves. For projects involving improved seed varieties recommended by the Nepal Agricultural Research Council (NARC), banks can charge only a 1.5 percent premium over the base rate.