Banking News — Despite more than Rs 700 billion being invested in Nepal’s agricultural sector through the banking system, inadequate market infrastructure, poor price assurance, and weak commercialization have prevented the sector from achieving the expected outcomes, prompting Nepal Rastra Bank (NRB) to revise its agricultural lending policy.

Speaking during the second session of the National Banking Discourse 2026, titled “Expanding Investment in Agriculture: The Role of Banks, Government and the Private Sector,” NRB Executive Director Paudel said the central bank has consistently introduced policies to expand financial access to agriculture, even as commercial banks continued to view the sector as high-risk.

According to Paudel, agricultural lending has increased significantly over the past decade due largely to NRB’s policy interventions.

“Ten years ago, banks had invested only Rs 251 billion in agriculture. Today, agricultural lending has reached Rs 717 billion, with nearly Rs 700 billion currently outstanding in the market,” he said.

He noted that agricultural lending, which accounted for only 5 to 7 percent of total bank credit until 2020, has now grown to approximately 12 percent of the overall lending portfolio.

“This clearly shows that banks have expanded financing for agriculture. The issue is not the lack of lending, but the lack of supporting systems that enable agricultural investment to succeed,” Paudel said.

Market Access Remains the Biggest Challenge

Paudel emphasized that Nepal’s farmers need reliable markets and fair prices more than additional credit.

“Farmers require clear government policies, guaranteed markets, and price stability,” he said. “Neither Nepal Rastra Bank nor commercial banks can create agricultural markets on their own.”

He explained that while the government introduced concessional agricultural loan schemes and interest subsidy programs, critical infrastructure—including wholesale markets, storage facilities, processing industries, and organized supply chains—has failed to develop at the required pace.

As a result, increased lending has not translated into higher productivity or sustainable agricultural growth.

Interest Subsidy Program Faces Funding Delays

According to Paudel, approximately Rs 48 billion is currently invested under the government’s concessional agricultural loan program.

However, he revealed that the program has encountered significant challenges because both farmers and banks have been waiting for more than a year to receive government reimbursements for promised interest subsidies.

Although NRB has introduced numerous supportive policies and banks have actively promoted concessional agricultural loans, delayed subsidy payments have weakened the effectiveness of the program.

Supply-Side Support Exists, but Demand Remains Weak

Paudel noted that the central bank has implemented several measures to encourage banks to finance agriculture.

These include:

• Limiting the maximum lending premium to 1.5 percent above the base rate.
• Allowing banks to independently value collateral and provide loans of up to Rs 2 million without additional procedures.
• Permitting project-based agricultural financing of up to Rs 50 million.

Despite these incentives, he said genuine demand for agricultural credit remains limited because farming continues to be perceived as a high-risk business with uncertain returns.

“While lending policies have become more flexible, the demand side remains weak due to persistent structural risks in agriculture,” he said.

Why NRB Reduced the Agricultural Lending Requirement

Previously, Nepal Rastra Bank had instructed commercial banks to gradually increase agricultural lending to 15 percent of their total loan portfolio by 2028 (2085 BS).

Although banks substantially expanded lending over the past decade, rising loan defaults in the agricultural sector raised concerns about financial stability.

“When agricultural loans become non-performing because production and markets fail, the losses ultimately threaten depositors’ money and the overall stability of the financial system,” Paudel explained.

In response to the increasing default risk, NRB recently reviewed its policy and revised the mandatory agricultural lending requirement.

Under the updated framework, commercial banks are now required to allocate at least 10 percent of their total lending portfolio to agriculture instead of the previously targeted 15 percent.

Paudel clarified that the policy adjustment was made primarily because agricultural loan defaults have increased, not because agricultural financing itself is ineffective.

Commercialization Is Key to Sustainable Agricultural Finance

Paudel stressed that the majority of agricultural loans have been utilized appropriately and should not be viewed as failures.

“The problem is not that all agricultural loans have gone bad,” he said. “Most borrowers have used the funds productively, but the country has failed to develop the markets, pricing mechanisms, and infrastructure needed to support commercial agriculture.”

Looking ahead, he said both the government and financial institutions must place greater emphasis on ensuring that agricultural loans contribute directly to higher production and long-term productivity.

“Banks should carefully assess whether a loan will genuinely increase agricultural output before extending financing,” he said.

Paudel concluded that expanding agricultural credit alone cannot transform Nepal’s farming sector.

“Unless Nepal modernizes its traditional farming system and builds the necessary market infrastructure, banking investment by itself will not be sufficient to drive sustainable agricultural development,” he said.