Deprived-Sector Lending & Microfinance Policy in Nepal (NRB Rules)

Deprived-sector lending is a directed-credit rule administered by Nepal Rastra Bank (NRB), the country's central bank, under its Unified Directives to licensed banks and financial institutions (BFIs). It obliges every commercial bank (Class A), development bank (Class B) and finance company (Class C) to lend a minimum share of its total outstanding loans and advances to a legally defined 'deprived sector' made up of the poorest and most excluded households. The policy exists so that mainstream, profit-oriented BFIs cannot simply lend to the affluent urban market while ignoring the rural and low-income population.

NRB defines the deprived sector to include low-income and socially marginalized groups: backward women, indigenous and tribal peoples, Dalits, persons with disabilities (including the blind and the hearing-impaired), marginal and small farmers, artisans, labourers and landless squatter families. Qualifying activities cover small collateral-free loans, micro-enterprise credit, and financing for housing and renewable energy for these groups. Deprived-sector lending is distinct from the broader 'priority sector' or 'prescribed sector' lending targets (agriculture, energy and micro/cottage/small/medium enterprises), though the two policies work together to steer credit toward development goals.

Because most large banks lack the branch network and group-lending expertise to reach this population directly, the requirement is usually met indirectly. Banks satisfy a large part of their deprived-sector obligation by wholesale-lending to microfinance financial institutions (MFIs), which then on-lend to poor borrowers in villages. This makes the deprived-sector mandate the single most important source of funding for Nepal's microfinance industry.

NRB first introduced the 'Deprived Sector Credit Programme' in 1990 (2047 BS), initially requiring banks to invest around 3% of their total loans in credit for the poor. This launched alongside the wider financial-sector reforms that followed the 1990 restoration of multiparty democracy, a period that also saw five regional Grameen Bikas (rural development) banks set up on the Bangladesh Grameen group-lending model to serve deprived women.

For years the requirement was graduated by bank class: under Directive 17, Class A banks lent at least 3%, Class B banks 2% and Class C companies 1.5% of total outstanding loans and advances to the deprived sector. Over successive monetary policies NRB raised and harmonised these figures, and the target was standardised so that all Class A, B and C institutions must direct at least 5% of total loans and advances to the deprived sector. This 5% floor is checked against each institution's own loan book, and BFIs that fall short face monetary penalties assessed on the shortfall.

The rule is deliberately proportional rather than a fixed rupee amount: as a bank's loan book grows, the rupees it must place in the deprived sector grow with it. This keeps microfinance funding expanding roughly in step with the overall credit market. Because exact percentages and penalty rates are adjusted through the annual Monetary Policy and periodic Unified Directive amendments, readers should confirm the current figure against the latest NRB directive for any regulatory or academic use.

Microfinance in Nepal has long attracted criticism that MFIs charge poor borrowers high effective rates once service charges and compulsory savings are counted. NRB has therefore regulated MFI pricing through two successive tools: an interest-rate spread cap and, later, an outright interest-rate ceiling. In its 2016/17 (2073 BS) Monetary Policy, NRB capped the interest-rate spread of MFIs at 7 percentage points, where 'spread' is the gap between the average rate an MFI charges borrowers and its own cost of funds. The same policy tightened the sector by pausing new MFI licences and raising the capital floor for wholesale MFIs.

NRB subsequently imposed a hard ceiling: from around 2073 BS (2016/17) MFIs could not charge borrowers more than 15% interest on loans, a rule that became the sector's defining number for years. Alongside the rate cap, NRB has periodically capped service charges and restricted how often rates can change, to stop institutions from recovering margin through fees after the headline rate is limited.

From Shrawan 1, 2082 BS (mid-July 2025), NRB replaced the flat 15% cap for new loans with a base-rate-plus-spread model, similar to how commercial banks price loans. Each MFI must calculate a monthly base rate reflecting its cost of funds and operations, and may add a premium of at most 3 percentage points over its recent average base rate to set the lending rate. A backstop remains: the lending rate must not exceed the latest monthly average base rate of commercial banks plus 9 percentage points. Loans disbursed before Shrawan 1, 2082 remain subject to the earlier maximum of 15%. MFIs must set rates quarterly using the previous three months' average base rate, submit their base rate to NRB within about 15 days each month, and publish it on their website.

A recurring danger in group-based microfinance is over-indebtedness: a borrower takes small loans from several MFIs at once, uses new loans to repay old ones, and eventually collapses under the combined burden. To curb this, NRB's Unified Directives long enforced a 'one client, one microfinance institution' principle, under which a single borrower was expected to hold a microloan from only one MFI. If more than one MFI was found lending to the same client beyond the limit, the excess loans could be treated as non-performing, penalising the lenders and discouraging the practice.

NRB has since relaxed the strictest form of this rule. Under directive amendments published on 29 Shrawan 2081 BS (29 July 2024), an individual may now borrow from up to two MFIs, provided the borrower's total microfinance debt stays within the prescribed ceilings. Crucially, a borrower who already has a loan from a commercial bank or other BFI is generally not eligible to also borrow from an MFI, keeping microfinance targeted at those outside the formal banking system. The reform tries to balance realistic access to credit against the systemic risk of unchecked multiple borrowing.

To make the limit enforceable, MFIs must verify a borrower's existing debts through the Credit Information Bureau and obtain a self-declaration from the borrower confirming they have not taken loans from other banks or financial institutions. NRB also sets rupee ceilings by loan type, for example larger limits for group-guaranteed loans (with higher limits for clients with a good multi-year credit history) and smaller limits for family-guaranteed, housing and renewable-energy microloans. These caps and rules are periodically revised, so current thresholds should be checked in the latest Unified Directive.

The deprived-sector system works as a chain. At the top, Class A, B and C banks must place at least 5% of their loans in the deprived sector. Rather than run village group-lending themselves, most banks lend wholesale to Class D microfinance financial institutions, which then retail tiny collateral-free loans to poor clients organised into joint-liability groups. In this way the banks' regulatory obligation becomes the funding line for the MFI industry, and the MFIs supply the last-mile delivery the banks cannot.

Nepal's microfinance sector is licensed and supervised by NRB's Microfinance Institutions Supervision Department. The sector has grown into dozens of licensed Class D MFIs, a mix of retail institutions that lend directly to clients and a smaller number of wholesale institutions that fund the retailers. Many of these MFIs are listed on the Nepal Stock Exchange (NEPSE), which makes their pricing, spreads and asset quality a matter of public and investor interest as well as consumer protection.

Because so much microfinance funding originates in a compliance requirement rather than pure market demand, the policy is periodically debated. Supporters credit it with pushing formal credit into remote areas and expanding financial inclusion; critics argue that mandated funding can encourage rapid, poorly-underwritten growth, market saturation in accessible districts, and the very multiple-borrowing problem the client rules now try to contain.

The underlying rationale for all three tools is the same: correcting a market failure. Left to commercial logic, banks concentrate lending on collateral-rich, low-risk, urban borrowers, leaving the rural poor without formal credit. The deprived-sector mandate forces a minimum flow of funds toward that excluded population; the interest-rate regulation protects those low-income borrowers from excessive pricing once the funds reach them; and the multiple-borrowing rule protects both borrowers and the system from the debt-stacking that has caused microfinance crises elsewhere in South Asia.

The move from a fixed 15% cap to a base-rate-plus-spread model reflects a broader regulatory shift toward transparent, cost-linked pricing rather than blunt ceilings. A flat cap is simple and popular but can either be too high (permitting fat margins) or too low (pushing lending to unregulated moneylenders); an NRB study reportedly recommended replacing the fixed cap with a spread-based approach, which the 2082 BS directive largely adopted. The commercial-bank base-rate backstop keeps a hard upper bound so the reform does not simply free MFIs to raise rates.

For students, MFI staff and policy researchers, the key takeaway is that these three policies are interlocking, not separate: the deprived-sector requirement supplies the funding, the rate rules govern how expensively that funding may be on-lent, and the borrowing limits govern how much any one client may take on. All three are revised through NRB's annual Monetary Policy and Unified Directives, so the exact percentages, caps and ceilings should always be confirmed against the most recent NRB publication before being cited.