Following the COVID-19 pandemic, Nepal Rastra Bank adopted an “expansionary and flexible monetary policy” during fiscal years 2020/21 and 2021/22 to help revive the economy. Although this boosted liquidity and stimulated economic activities, investments concentrated in non-productive sectors like real estate, stocks, vehicle purchases, and consumer goods imports. As a result, indicators like the current account balance and foreign exchange reserves deteriorated, prompting a shift to a tighter policy in 2022/23 and a cautiously flexible approach in 2024/25.
NRB had raised policy rates to restrict credit flows, especially in unproductive areas like real estate, stock markets, and working capital. However, with a slowdown in economic activities, NRB is now gradually reverting to earlier methods to stimulate growth.
In his first monetary policy announcement on Friday, newly appointed Governor Dr. Biswo Nath Poudel emphasized reviving the economy by prioritizing stock market and real estate transactions. “Considering moderate inflation, comfortable foreign exchange reserves, and the broader economic outlook, the direction of the monetary policy has been kept cautiously flexible to revitalize the economy,” the policy for FY 2025/26 states. It aims to lower interest rates by adjusting the policy rate corridor and increase liquidity, especially directing it toward the stock market and real estate sectors. However, experts have warned of potential long-term risks.
Dr Prakash Kumar Shrestha, member of the National Planning Commission, expressed concern over the renewed flexibility toward the stock and real estate sectors. “Earlier, NRB began policy corrections when external economic indicators tightened,” he said. “Although the situation is currently stable, giving priority to stocks and real estate again could create economic bubbles.”
Support for Stock Market and Real Estate
According to Nepal Rastra Bank data, consumer inflation dropped to 2.72% as of mid-June, which is its lowest in five years. Likewise, due to high remittance inflows, foreign currency reserves increased by 25.9% compared to the same period last year, reaching Rs 2.569 trillion. On this basis, Governor Poudel focused on stimulating the economy through flexible policies targeting the stock market and housing loans.
Under former Governor Maha Prasad Adhikari, strict provisions had been introduced in FY 2021/22 for stock-backed loans, capping loans from a single bank at Rs 40 million and from the entire financial system at Rs 120 million per individual. Following pressure from investors, the Rs 40 million cap was removed in FY 2022/23. In October 2023, unified directives raised the limit to Rs 150 million for individuals and Rs 200 million for institutions. The then Governor Adhikari removed the institutional ceiling altogether in the current fiscal year. Governor Poudel has now raised the overall stock loan limit to Rs 250 million in the latest monetary policy. While stock loans had already surged, the new policy opens the door for even greater expansion.
Governor Poudel had already shown market-friendly intent by reducing the risk weight on stock loans from 125% to 100% during the policy’s midterm review in May. Similarly, the new monetary policy introduces further flexibility to revive the sluggish real estate market. The loan ceiling for personal residential housing construction or purchase has been raised from Rs 20 million to Rs 30 million. For first-time homebuyers, the loan-to-value (LTV) ratio is capped at 80%, while for others, it is limited to 70%. The LTV ratio refers to the proportion of loan relative to the appraised value of the collateral.
Additionally, the policy provides for restructuring and rescheduling loans to land development and construction firms registered with government-approved institutions, offering relief to struggling real estate businesses.
NRB is also easing its stance on working capital loans. The upcoming fiscal year’s monetary policy allows adjustments to guidelines on such loans based on the nature of businesses, such as agriculture, small and cottage industries, education, health, media, and sports, and their revenue and repayment cycles.
Focus on Credit Expansion
Despite surplus liquidity in banks and financial institutions, credit expansion has stalled. To address this, the new monetary policy reduces the upper bound of the interest rate corridor (the bank rate) from 6.5% to 6% and the lower bound (deposit rate) from 3% to 2.75%. The policy rate itself has been cut from 5% to 4.5%.
As of mid-June, commercial banks’ average deposit interest rate stood at 4.29% while lending rates had fallen to 7.99%. Experts warn that further rate cuts could trigger capital flight rather than investment growth.
“Just as honking a horn doesn’t widen the road, cutting interest rates doesn’t automatically increase investment,” former Finance Secretary Rameshwor Khanal wrote on social media, critiquing the rate-cut strategy.
To encourage credit expansion, NRB has also announced measures to ease pressure on banks’ capital adequacy. For example, regulatory reserves created from non-banking assets held for up to two years can now count as supplementary capital. With central bank approval, banks will also be allowed to raise capital as needed. These provisions aim to relieve banks facing capital constraints despite having sufficient liquidity.
Kiran Pandit, NRB’s Executive Director and Spokesperson, said that while the scope of monetary policy is narrower than that of fiscal policy, it has been focused on energizing the economy in the short term. “We’re trying to stimulate economic activity and support the government’s budget while remaining alert to potential negative consequences,” he said.
Plans for Policy Reforms
Governor Poudel’s monetary policy also introduces several reform plans. Banks and financial institutions will now be allowed to invest in debentures issued by infrastructure-related institutions formed to channel investments into government-prioritized sectors. A comprehensive review will be conducted of the classification and scope of banks and financial institutions. Policies related to branch expansion and microfinance dividend ceilings will also be reviewed.
Additionally, loans up to Rs 300,000 given to youths going for foreign employment, whether secured or unsecured, can now be classified as loans to the underprivileged. The foreign currency exchange limit for outbound travelers has been raised to USD 3,000. To improve loan access for lower- and middle-income groups, banks can self-assess and issue loans up to Rs 1 million for agriculture and micro, small, and medium enterprises.
The policy promises to ease credit for high-yield crop varieties recommended by NARC and provide loans for businesses along the Postal and Mid-Hill highways, including other major industrial corridors.
