Directed Lending Requirement Relaxed to 30 Percent: Central Bank Broadens Scope, Signals Policy Shift

Nepal Rastra Bank has eased its directed lending policy, lowering the mandatory share of loans that banks and financial institutions must channel into priority sectors from 40 percent to 30 percent. The move, introduced through an amendment to the unified directive, reflects a shift towards a more flexible credit policy while maintaining focus on productive sectors of the economy.

Previously, banks were required to allocate 15 percent of their total loans to agriculture, 10 percent to energy, and 15 percent to micro, cottage, small and medium enterprises (MSMEs), making up a combined 40 percent. The revised framework reduces this threshold and restructures sectoral allocation by expanding the definition of priority sectors. Tourism, information technology, and industries based on domestic raw materials have now been added, and all are grouped under a broader productive sector category.

Under the new provision, the minimum lending requirement to agriculture has been reduced from 15 percent to 10 percent, effective from Poush 2083. This replaces the earlier provision that required banks to meet the 15 percent agricultural lending target by Asar 2085. The consolidation of sectoral targets is also evident as separate quotas for energy and MSMEs have been merged. Banks will now need to allocate a combined 20 percent of total loans across energy, tourism, MSMEs, information technology, and domestic raw material-based industries.

The central bank has also introduced differentiated targets for other financial institutions. Development banks are required to maintain 20 percent of their lending in these sectors, while finance companies must allocate 15 percent. Additionally, loans extended to MSMEs—up to Rs 30 million for general businesses and up to Rs 50 million for production-oriented industries—as well as export-oriented industries based on domestic inputs, will qualify under directed lending.

From a compliance standpoint, the new policy introduces greater flexibility. Banks can now count outstanding loan balances towards meeting the directed lending requirement. Furthermore, institutions that fall short of the prescribed threshold can purchase directed loan portfolios from other institutions that have exceeded their targets, based on mutual agreement and fees, although such transactions will be valid only for reporting purposes.

Policy Interpretation and Impact

This policy revision indicates a clear shift in regulatory thinking. By reducing the mandatory threshold, the central bank appears to acknowledge the practical challenges banks have faced in meeting the earlier 40 percent requirement, particularly in agriculture, where credit absorption capacity and risk management remain concerns.

At the same time, expanding the scope to include tourism and information technology reflects a strategic alignment with Nepal’s evolving economic priorities. These sectors have shown strong growth potential and are increasingly seen as drivers of employment, foreign exchange earnings, and digital transformation. By bringing them under directed lending, the central bank is indirectly encouraging banks to diversify their portfolios towards emerging and high-impact sectors.

However, the reduction in the agriculture lending requirement from 15 percent to 10 percent may raise concerns about long-term support for the agricultural sector, which remains a backbone of the economy. While the policy provides flexibility, there is a risk that banks may prioritize relatively lower-risk sectors like tourism and IT over agriculture, potentially affecting rural credit flow.

The introduction of a mechanism allowing banks to buy and sell directed loan portfolios for reporting compliance also reflects a pragmatic approach. While it helps institutions meet regulatory thresholds, it may dilute the core objective of ensuring actual credit flow to priority sectors if not monitored closely.

Overall, the revised directive balances flexibility with policy intent. It reduces pressure on banks, aligns credit flow with emerging economic sectors, and introduces operational ease. The real test, however, will lie in effective implementation—whether banks genuinely expand lending to productive sectors or merely adjust portfolios to meet compliance on paper.