Commercial banks will now be subjected to fine if they fail to extend at least 20 percent of their total loan to the productive sector. Similar fine will be collected from development banks and finance companies that have failed to disburse at least 15 percent and 10 percent of the total credit, respectively, to the productive sector.

The Nepal Rastra Bank (NRB), the central bank, came up with a directive in this regard on Wednesday instructing BFIs to meet the requirement within mid-July.

The NRB has said fine for banks and financial institutions (BFIs) that breach the regulatory order would be calculated based on highest lending rate offered by BFIs to borrowers. This lending rate would be levied on amount that BFIs have failed to lend to the productive sector, says the directive. This means if banks were supposed to lend, say, Rs200 to the productive sector but have only extended, say, Rs150 till mid-July, then highest lending rate offered by the financial institution would be applied to the deficit amount of Rs50 to collect the fine.

The NRB had fixed the floor for productive sector lending several years ago and had issued a deadline of mid-July 2016 to meet the requirement. 

Till the deadline, commercial banks had extended only around 16.8 percent of the total loan to the productive sector. Despite this, the NRB did not take any action.

Instead, it came up with another provision that requir-ed commercial banks to exte-nd at least 15 percent of the total loan to the agricultural and hydropower sectors within mid-July 2017. Earlier the floor on agricultural and hydropower sectors lending stood at 12 percent.

Loans extended to the agricultural and hydropower sectors are also considered as productive sector lending. Other areas under the productive sector include tourism, cottage and small enterprises, and public city transport services operated in Biratnagar, Janakpur, Birgunj, Pokhara, Bhairahawa, Nepalgunj, Dha-ngadhi and the Valley.

Although directed lending is not practiced in free market economies like Nepal, the NRB says it had to resort to this measure, as BFIs focused too much on unproductive sector, such as real estate and stock market. Over exposure to unproductive sectors drives up asset prices building inflationary pressure, reducing the value of money.