Nepal slashes interest subsidy limits for concessional loans amid concerns over misuse

KATHMANDU: In a bid to enhance the effectiveness of concessional loans aimed at boosting production, creating jobs, and fostering entrepreneurship, the Nepalese government has decided to reduce interest subsidy rates.

Currently, women borrowers receive a 6% interest subsidy, while other borrowers are entitled to a 5% subsidy. However, these rates are set to be significantly reduced, with discussions underway to lower subsidies for women to 3% or 4%, and for others to 2% or 3%.

This decision comes amid growing concerns over the misuse of subsidized loans, as highlighted by an independent evaluation commissioned by the Nepal Rastra Bank (NRB) . The report revealed that approximately 18% of concessional loans were misused , either through improper allocation, duplication, or outright abuse.

Why the Change?

The reduction in interest subsidies is driven by several factors:

Declining Interest Rates : Commercial banks have already lowered their lending rates to single digits (6-7%), making the current subsidy levels redundant.

Misallocation of Funds : A significant portion of subsidized loans did not reach the intended beneficiaries or were used for unintended purposes.

Fiscal Constraints : The government currently owes around Rs. 13 billion in unpaid subsidies, creating financial pressure.

“With banks offering loans at 6-7% interest rates, adding a 5-6% subsidy makes the effective interest rate almost zero for borrowers,” said a government official. “This undermines the program’s objectives, so we’re revising the guidelines to ensure better utilization.”

Proposed Revisions to Loan Programs

Under the revised framework:

Subsidy Rates : Women borrowers may see their subsidies drop from 6% to 3% or 4%, while others could see a reduction from 5% to 2% or 3%.

Loan Caps : The maximum loan amount for agriculture under the program is also being reduced. Currently capped at Rs. 500,000, it will likely be lowered to cater primarily to small-scale farmers.

Loan Types : Of the 10 types of concessional loans currently available, some are under review for discontinuation or modification due to low uptake or misuse.

“We’ve identified loans with fewer than 100 borrowers, which raises questions about their relevance,” said a source. “These loans may either be discontinued or adjusted to better align with current needs.”

Independent Evaluation Highlights Misuse

An independent audit conducted by Joshi & Bhandari Chartered Accountants evaluated 170,460 borrowers who received concessional loans. Key findings include:

7% of loans were not utilized for their intended purpose.
12% of loans failed to identify the targeted beneficiary group.
6% of loans were used multiple times by the same borrower.
11% of loans raised suspicions of misuse.

Collectively, these figures indicate that nearly 18% of concessional loans were misused , prompting urgent reforms.

Government Takes Action

Based on the audit findings, the NRB has taken several corrective measures:

Loan Recovery : Banks and financial institutions have been instructed to recover improperly disbursed loans. Some repayments have already been made, according to NRB sources.

Policy Revisions : The central bank is revising its concessional loan policy to prevent future misuse. This includes stricter monitoring mechanisms and clearer guidelines for loan allocation.

Enhanced Accountability : Responsibility for ensuring proper use of funds now lies squarely with the Nepal Rastra Bank , commercial banks, and borrowers.
“The Ministry of Finance will no longer shoulder sole responsibility for these programs,” said Ram Prasad Ghimire, Secretary of Finance . “We expect all stakeholders—banks, financial institutions, and borrowers—to ensure accountability and transparency.”

Broader Implications

The concessional loan program was introduced to promote economic growth, job creation, and entrepreneurship. However, widespread misuse has undermined its effectiveness. By reducing subsidies and tightening regulations, the government aims to:

Encourage productive use of loans in sectors like agriculture, manufacturing, and services.

Prevent wasteful spending and ensure funds reach the intended beneficiaries.

Align loan programs with current market conditions and fiscal realities.

The proposed changes to the concessional loan program are expected to take effect after approval from the Council of Ministers . Once implemented, they will mark a significant shift in how Nepal manages its subsidized credit initiatives.

“This is not just about cutting subsidies but about ensuring that every rupee spent contributes to meaningful development,” said a senior official. “Our goal is to make the program more relevant, efficient, and impactful.”

As Nepal grapples with challenges like fiscal constraints and loan misuse, this reform underscores the government’s commitment to fostering sustainable economic growth while addressing systemic inefficiencies.