Small and medium enterprises (SMEs) contribute significantly to a nation’s economy – manufacturing, employment generation, exports, and GDP growth. In emerging countries, SMEs contribute around 40% of the total GDP and 60% of the total employment. Likewise, in Nepal, SMEs contribute around 22% of the GDP and generate around 17 lakh employment. By the end of the fiscal year 2074/75, there were 275,433 SMEs registered in Nepal. Multiple sources finance these SMEs in Nepal. They are banks and financial institutions, cooperatives, venture capitals/private equities or capital markets. One could also opt to finance the venture on their own. Amongst these, the banking sector is noted as the main source of SMEs financing in Nepal.
In this context, to assess the current situation of SMEs financing in Nepal, the research department of Nepal Rastra Bank led research to find the problems and possibilities of SMEs financing and to recommend suggestions to make their financing simple, effective and accessible. The target audience of the study included SMEs, which fell under the definition based on the Industrial Enterprises Act, 2073.
Five of the key findings from the ‘SMEs financing in Nepal’ report published by Nepal Rastra Bank on Bhadra, 2076 are listed below:
1) SMEs use various sources to finance their initial funds. The sources that are used consists – 33% from ancestral properties, 26% from personal savings, 16% from the loans taken from banks and financial institutions, 7% from remittance income, 6% from unofficial loans, 6% from the loans from cooperatives and 0.5% from venture capitals. There have not been any cases where SMEs have used the capital market to collect funds for their initial stage.
2) Only a half of the SMEs in operation have used loans from banks and financial institutions, amongst which 85% of the SMEs take loans from Commercial banks. Majority of the small enterprises take loans of less than NPR 5 million (USD 43,848) whereas the majority of the medium enterprises take loans of more than NPR 50 million (USD 43,848). Amongst these loans, two-third has been short-term loans.
3) SMEs are paying an average of 12.51% interest rate and 1% service charge on loans whereas they require around 38 days on an average to get the loans from the banks and financial institutions.
4) The main problems with getting loans from banks and financial institutions are the inconveniences in the processes, high-interest rates and the lack of collaterals. In addition, a majority of SMEs do not know about various programs that exist for SMEs loans. That is why the use of concessional loans remains negligible whereas SMEs refinancing has not been effective.
5) The lack of institutional capacity development and the chances of loans being misused have also prevented loans from getting to SMEs. SMEs feel easy to take loans from cooperatives but their high interest rates are problematic. In addition, adequate numbers of venture capital/private equity companies have also not grown to help with SMEs financing.
 Central Bank of Nepal
SMEs Financing in Nepal 2076, Nepal Rastra Bank