Banks Cut Lending to Deprived Sector Amid Recovery Problems

Banks and financial institutions have begun reducing loans to the deprived sector due to growing difficulties in loan recovery.

According to data published by Nepal Rastra Bank (NRB), banks and financial institutions had extended Rs 365 billion in loans to the deprived sector by the end of fiscal year 2023/24. By the end of fiscal year 2024/25, such lending declined by 18.88 percent to Rs 296 billion. In contrast, overall lending by banks and financial institutions increased by 8.17 percent during the same period.

Compared to fiscal year 2023/24, deprived-sector lending declined in all provinces in fiscal year 2024/25, with Madhesh Province recording the steepest drop of nearly 40 percent.

Despite the decline, banks’ investment in the deprived sector still exceeds the regulatory requirement. NRB mandates banks and financial institutions to invest at least 5 percent of their total loan portfolio in the deprived sector.

Banks channel deprived-sector loans both directly and indirectly through wholesale lending to microfinance institutions. However, tighter regulatory measures on microfinance lending and mounting recovery issues—largely due to loan default movements—have discouraged banks from expanding exposure to the sector.

Nepal Microfinance Bankers Association President Ram Bahadur Yadav said strict NRB policies and recovery challenges have forced banks to scale back deprived-sector lending.

“After NRB reduced the loan ceiling, the credit growth of microfinance institutions slowed,” Yadav said. “As a result, banks’ investment in this sector has also been affected.” He added that organised movements against loan repayment have further dampened banks’ willingness to increase lending. However, he expressed optimism that credit growth would gradually recover after NRB recently relaxed some provisions.

NRB had issued a directive in October-November 2022 after borrowers protested against microfinance institutions, limiting individuals to loans from only one microfinance institution and capping the loan amount at Rs 700,000. The directive also barred borrowers who had taken microfinance loans from accessing credit from banks and financial institutions.

NRB later eased the provision from mid-July 2024, allowing borrowers to take loans from up to two microfinance institutions, though it did not revise the loan ceiling at the time. In mid-November to mid-December 2025, NRB raised the maximum limit on collateral-based loans issued by microfinance institutions from Rs 700,000 to Rs 1.5 million through the first quarterly review of the current fiscal year’s monetary policy.