The Nepal Rastra Bank (NRB) has reduced the loan loss provisioning for performing loans to 1% from 1.1%, restoring it to its pre-pandemic level as part of its mid-term review of the monetary policy for the current fiscal year.
Following the announcement of the monetary policy in July last year, NRB had initially lowered the provisioning requirement from 1.2% to 1.1% through a directive. Prior to that, the central bank had raised it to 1.3% after the Covid-19 pandemic.
According to NRB’s Deputy Spokesperson Dr. Dilli Ram Pokharel, the latest reduction will boost banks’ profits and enhance their lending capacity, allowing them to extend more credit to businesses and consumers.
Read: Monetary Policy ‘Cautiously Accommodative’ to make the Economy Vibrant: NRB
In a major policy shift, microfinance financial institutions (MFIs) will be required to link their lending rates to their base rates starting mid-May 2025. Currently, MFIs operate under a 15% interest rate Bankers have long advocated for an automated interest rate system based on the base rate rather than a fixed limit, arguing that it would offer more flexibility and transparency in lending. The new policy is expected to create a more market-driven approach to interest rates in the microfinance sector.
NRB has also made adjustments to lending and investment policies to improve liquidity management and credit flow.
One key change is to maintain the loan-to-value (LTV) ratio for private and all types of electric vehicles at 60%. This marks a significant tightening from the previous 80% LTV ratio for electric vehicles (EVs). The move comes amid a surge in EV imports and increasing bank lending in the sector.
Read: NRB Keeps Monetary Policy Constant after Q1 Review
Additionally, the Non-Deliverable Forward (NDF) limit for banks has been raised from 15% to 20% of primary capital. According to Pokharel, this will allow banks to invest more in foreign financial instruments, helping them manage liquidity more efficiently.
Despite rising inflation, which typically calls for higher interest rates, NRB has opted to keep all key policy rates unchanged, citing the need to boost economic activities.
The monetary policy for fiscal year 2024/25, which took effect on July 16, 2024, had previously reduced the bank rate from 7% to 6.5% and the policy rate from 5.5% to 5%, while keeping the deposit collection rate unchanged at 3%. These rates remain unchanged in the latest review.
The bank rate, policy rate, and deposit collection rate represent the upper, middle, and lower limits of NRB’s interest rate corridor, respectively.
This news has been updated.
