AGRICULTURAL CREDIT AND PRODUCTIVITY OF COMMERCIAL BANKS IN NEPAL

Abstract

The World Bank has highlighted that in the least developed countries, the agriculture sector can contribute over 25% of GDP and is vital for economic progress. In Nepal, a national shift towards prioritizing industrial and service sectors has led to a relative underdevelopment in agriculture. However, global trends indicate that agricultural development can spur overall economic growth. Therefore, it is crucial to investigate whether the agricultural sector in Nepal is benefiting from commercial bank loans. This study analyzes the short-term and long-term effects of agricultural credit on agricultural growth in Nepal from 1988 to 2022 using time series data. The variables analyzed include agricultural growth (GDPA), commercial bank lending to agriculture (CBLA), fertilizer supply (FERT), seed supply (SED), and irrigation supply (IRI). The ARDL cointegration test results show a significant and positive long-term relationship between lending and GDPA, while the ECM indicates that CBLA is insignificant in the short term. The findings suggest that credit has facilitated the increased use of purchased inputs and changes in the input mix, supporting long-term agricultural evolution, but it has not contributed to short-term agricultural GDP growth. Thus, based on the results and existing research in Nepal's context, it can be concluded that lending to the agriculture sector is beneficial. Thoughtful plans, programs, and actions are needed to transform the agriculture sector. It is recommended that both the government and the Nepal Rastra Bank (NRB) reconsider current policies, increase credit flow to the agriculture sector, and invest more in actual farmers to ensure they have access to the necessary services and facilities to drive agricultural transformation.