Priority Sector Lending: Importance and Complication in Nepal

Som Thapa/Investopaper

Lending in the key areas like agriculture, tourism energy/hydro, education, social infrastructure, small and cottage industries, cement, garment, etc.by banks and financial institutions is priority sector lending. Priority sector lending is necessary for the overall development of the economy. This policy is designed to ensure easy credit availability to the vulnerable group and sections of the society. Banks are required to finance certain portion of credit in that sector basically, for the economic upliftment of the nation which is intervened by the central bank. Most of the developing nation faces backward position in channelizing their funds in the productive sector. That’s’ why central bank issues some guidelines regarding the minimum limit percentage to sanction the loan with no upper limit.

Commercial Banks are required to lend 25 percent of credit in the priority sector.

Priority sectors are the real sectors of the economy from where the country generates a sustained amount of Gross Domestic Product. Basically the economy is divided into three parts i.e. Primary sector (Agriculture), Secondary sector (Manufacturing) and Tertiary sector (Service). So, Nepal Rastra Bank has prescribed the priority sectors which reflect the true picture in terms of productivity. These are the most mandatory lending areas. However, it is not fully complied with adherence to the Unified Directives issued by the Nepal Rastra Bank. Despite the increasing demand for credit, Banks and financial institutions are not able to sanction the loan limit on stipulated time as they see unknown probability in those areas. Mostly it is being done in order to boost the poorest sector of the economy.

Provisions regarding Priority sector lending

‘A’ class licensed institutions are mandated to lend a particular portion of their credit i.e. 10% on the agriculture sector and 15% combined on tourism and hydro/energy sector. They are compelled to lend 25% of credit altogether. ’B’ and ‘C’ class licensed institutions are required to lend 15% and 10% respectively of their total outstanding loans and advances. They can invest in agriculture, tourism energy/hydro, export, SME, medicine, cement, and garment industries too. Nepal Rastra Bank has imposed the fines and penalty quarterly for the shortfall in lending requirement as per the Nepal Rastra Bank Act,2058, section 81 and Unified Directives 2075(17). While measuring the portion of lending, 6 months prior loan and advances are considered along with bills purchase and discount.

Priority sector lending is becoming inconvenient to all commercial banks due to the unattractive demand for loans from those sectors.

Relaxation by Central Bank

Nepal Rastra Bank has provided flexibility towards taking an action against 6 Commercial Banks issuing new circulars dated 2076.03.30. Central Bank deferred the timing period up to Jestha 2076. As per Key Financial Indicators published by Nepal Rastra Bank, Nepal Bangladesh Bank has not fulfilled the prescribed criteria floating only 8.52% loan on the agriculture sector. It seems fines and penalties must be imposed on the bank for noncompliance with the directive. The highest interest rate taken by the bank is applied for penalty calculation. NRB Board might defer the time again which is against the rule. This is becoming inconvenient to all commercial banks due to the unattractive demand for loans from those sectors.

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