Relationship between agricultural growth and commercial bank lending in agriculture sector in Nepalese context

Abstract

The World Bank has noted that in least developed countries, the agriculture sector can account for more than a quarter of GDP and is crucial for economic growth. In Nepal, the shift in national priorities towards the industrial and service sectors has resulted in a relative lack of development in the agriculture sector. However, it has been observed globally that the development of the agriculture sector can lead to overall economic development. As a result, it is important to examine whether the agriculture sector in Nepal is growing through lending from commercial banks. This study examines short term and long term effect of agricultural credit on agriculture growth in Nepal during the period of 1987-2021 using time series data. The variables considered are agricultural growth (AGDP), lending on agriculture by commercial banks (LDCBS), fertilizer supply (FER), seed supply (SEED) and irrigation supply (IRI). The regression results from ARDL cointegration test shows that lending has significant and positive long-run relationship with AGDP whereas ECM suggests that LDCBS is insignificant in short-run. The findings suggest that credit has enabled the increased use of purchased inputs and changes in the input mix, support to the evolution of agriculture over the longer horizon but it has not contributed to short-term growth in agricultural GDP. Thus, on the basis of the acquired result and few existing researches in context of Nepal, it can be said that lending towards agriculture sector is beneficial in Nepal. Solicitous plans, programs and actions are duly needed to transform agriculture sector. It is advisable for both the government and the NRB to consider revisiting current policies, increase credit flow to the agriculture sector, and investing more in actual farmers to ensure that they have access to the necessary services and facilities to drive agricultural transformation.