Small and medium enterprises (SMEs) have been receiving the fewest loans despite claims by banks that they are priority customers.

According to Nepal Rastra Bank (NRB), only 2.6 percent of the total lending by commercial banks has gone to SMEs as of mid-November. They received Rs29.81 billion out of the Rs1.3 trillion issued till then.

“It is a really disappointing amount,” said Nara Bahadur Thapa, chief of the research department at the central bank. “Despite promises of increasing lending, there has not been substantial lending in this promising sector.”

However, banks argue that the central bank’s figure is misleading. “Our lending in the SME sector is 20 percent of the total portfolio,” said Upendra Poudel, chief executive officer of NMB Bank.

Poudel, who is also the president of the Nepal Bankers’ Association (NBA), said that NRB’s understanding of SME lending may be different, resulting in the low figure shown in its report. NMB Bank said that loans to enterprises of up to Rs15 million was SME lending.

Thapa, who is responsible for producing the country’s monthly economic update, said that the SME lending figure had been calculated based on the records submitted by banks. “We don’t have a specific definition for SME lending,” said Thapa. “The figure is based on the loans categorized under the SME heading by the banks themselves.”

According to NRB, insufficient collateral has been one of the major constraints in SME financing in Nepal. Poudel admitted that collateral was one of the issues, but the biggest issue in SME financing was borrowers not having well maintained account books as required by NRB.

The inability of potential borrowers to put up sufficient collateral has hit chances of boosting lending to the sector, and NRB said that it was necessary to establish a secured transaction registry office to address the problem.

“A secured transaction registry office needs to be set up to implement the Secured Transaction Registry Act,” said the central bank in its report on the country’s macro-economic situation.   

The act allows banks to issue loans against grain and livestock as collateral. This will enable people to borrow money even if they don’t have land and houses to offer as security.

The implementation of the act is expected to boost the demand for loans. However, Thapa said that banks did not seem to be too keen on implementing it.