The Nepal Rastra Bank (NRB) has lifted the maximum interest rate cap previously imposed on microfinance institutions (MFIs), allowing them to set loan rates based on their internal base rates plus a fixed premium. According to a circular issued on Thursday, MFIs will now be permitted to add up to 3 percentage points to their three-month average base rate when determining lending rates, starting from mid-July, marking the beginning of the new fiscal year (FY) 2025/26.
This policy shift replaces the interest rate ceiling that has been in place since 2016, when NRB capped MFI lending rates at 18%, later reducing the limit to 15%. A cap of 1.5% was also imposed on service charges. The restrictions were originally introduced to address growing complaints that MFIs were overcharging low-income and underserved borrowers with limited access to traditional banking.
However, microfinance operators have criticized the interest rate ceiling for undermining market-based pricing and operational sustainability. In response to sustained lobbying from the sector, the NRB, in its mid-year review of the current fiscal year’s monetary policy, announced the adoption of a base rate model for MFIs, aligning their interest rate mechanism with that of commercial and development banks.
Under the new framework, MFIs must calculate base rates by factoring in their cost of funds and adding a 0.75% return on capital. These rates must be updated monthly and submitted to the NRB within 15 days of each month’s end. Interest rates on loans will automatically fluctuate with changes in the base rate, promoting greater transparency and competitiveness.
While banks can freely determine their premiums over the base rate, NRB has placed a 3% cap on premiums for MFIs. Additionally, MFIs are barred from charging lending rates that exceed the average base rate of commercial banks by more than 9 percentage points.
Basanta Lamsal, former president of the Nepal Microfinance Bankers Association, noted that the move addresses a long-standing demand from the industry. He stated that the base rate mechanism will allow interest rates to align with market conditions and foster a more competitive lending environment for MFIs.
NRB Revises Rules on Dishonored Cheques and Blacklisting Procedures
In a separate directive, NRB overhauled its policy on cheque dishonor incidents, introducing new procedures that enable banks and financial institutions to blacklist individuals and entities responsible for issuing bounced cheques. The revision comes in line with recent amendments to the Banking Offense and Punishment Act, 2007.
Under the new “Cheque Dishonor Certification Procedures, 2025,” banks must first notify account holders if a cheque is likely to be dishonored and allow up to 45 days for the issuer to deposit the required funds. If the cheque remains unpaid, the cheque holder can file a formal complaint with the issuing bank or financial institution. Within five working days of receiving the complaint, the institution must recommend the issuer for inclusion in the credit information blacklisting database.
The directive also mandates that institutions must not charge any fees to cheque holders for certifying a dishonored cheque. The NRB stated that the updated rules are intended to strengthen accountability in financial transactions and reduce the incidence of cheque fraud across Nepal’s banking system.
