As banks fail to meet credit thresholds for priority sectors, central bank extends deadline for compliance

As many as 10 commercial banks out of a total of 27 had failed to meet the minimum credit threshold for the agricultural sector by mid-January this year, according to the Nepal Rastra Bank. Banks were indeed required to reach the threshold by mid-July last year, in line with the central bank’s directive.

Banks were supposed to extend at least 11% of their total lending to the agricultural sector by the end of the last fiscal year which ended in mid-July 2021, but failed to do so even six months after the date. limit.

Similarly, the number of banks failing to meet the credit threshold in the energy sector is even higher. As many as 14 banks fell short of the industry threshold as of mid-January this year, according to the central bank. Banks were supposed to extend at least 6% of their total loans to the energy sector by mid-July 2021.

The situation for loans to small and medium enterprises is similar. As many as 17 commercial banks had not reached the threshold for lending to the SME sector by mid-January this year.

According to central bank instructions, commercial banks were supposed to provide at least 11% of their total loans to SMEs by the end of last fiscal year. But the loan situation has not improved even six months after the deadline expired.

“One of the reasons banks have not reached lending thresholds is the Covid-19 pandemic which has hit businesses hard over the past two and a half years,” said Ashoke Rana, chief executive of the Himalayan Bank. “Even though lending has increased significantly in the first half of the current fiscal year, most lending has gone to finance imports instead of priority sectors.”

The Himalayan Bank, which has been exceptionally successful in lending to the agricultural sector, has failed miserably in increasing lending to the hydropower and small and medium enterprise sectors, according to the central bank.

The bank’s lending to the agricultural sector, which accounted for 23.62% of its total credit, as of mid-January, is the second largest and only second after the Agricultural Development Bank, whose lending to the sector accounted for 38 .28% of its total loans, according to central bank statistics.

Himalayan Bank lending to the hydropower sector and SMEs accounted for 2.03% and 1.79% of total lending respectively as of mid-January.

“We have been selective in lending to the hydropower sector,” Rana said. “When it comes to SMEs, we have given fewer loans in the Rs 10 million category. But we are providing up to Rs 60 million in loans to SMEs. Thus, our SME lending appears to be small by the central bank’s definition, which only counts loans below Rs 10 million as lending to the SME sector.

Banks that do not meet the threshold are subject to fines by the central bank. But the Nepal Rastra Bank on Wednesday left some leeway by telling banks that they can extend 32% of their total loans to priority sectors if they are unable to meet individual lending thresholds for agriculture (11 %), Energy (10%) and SME Sectors (11 percent).

The Agricultural Development Bank, which invested the highest amounts of loans to the agricultural sector among commercial banks in mid-January, was however only able to invest 4.75% of its total loans in the agriculture sector. energy in mid-January, according to the central bank.

Anil Upadhyay, managing director of the bank, said his bank had bought the energy bonds issued by NMB bank to increase lending to the hydropower sector.

The central bank allowed banks and financial institutions to honor their priority sector loans by purchasing relevant bonds issued by other banks and financial institutions. According to the central bank, 20.61% of the Agricultural Development Bank’s total credit went to SMEs.

However, most other banks have not reached the threshold in the energy sector. Upadhyay said one of the reasons banks have not met the thresholds is the lack of loanable funds in the past few months. “Even if they want to increase lending to meet the thresholds, they cannot do so due to lack of liquidity,” said Upadhyay, who is also the chairman of the Nepal Bankers Association.

Meanwhile, the central bank extended the deadline for commercial banks to meet priority sector lending thresholds.

Under new guidelines released on Wednesday, banks and financial institutions can now increase lending to the agricultural sector to 15% by mid-July 2025 from the previous deadline of mid-July 2023.

Similarly, they can increase their credit to the hydropower sector to 10% by mid-July 2025 from the earlier deadline of 2024 and they can increase loans to the SME sector to 15% by mid-July. July 2025 compared to the earlier deadline of mid-July 2024.

“In view of the impact of the Covid-19 pandemic on businesses, we have relaxed the provision regarding priority lending sectors to give relief to banks and financial institutions,” said Gunakar Bhatta, spokesperson for the central bank.

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