Relief for Banks as NRB Sets Countercyclical Buffer at Zero for Current Fiscal Year

Commercial banks will not be required to maintain additional capital in the current fiscal year (FY 2024/25) under the 'countercyclical buffer' provision. Nepal Rastra Bank issued instructions on Tuesday stating that the countercyclical buffer for FY 2024/25 will be set at zero percent.

According to Nepal Rastra Bank spokesperson Ramu Paudel, the countercyclical buffer was not implemented because the 'credit-to-GDP gap' of the banks remained within the limits outlined in the Capital Adequacy Framework 2015 up until the last fiscal year. Under this framework, a countercyclical buffer is applied if the credit-to-GDP gap exceeds 5 percentage points.

Nepal Rastra Bank had initially announced the implementation of the countercyclical buffer in accordance with the Capital Adequacy Framework in the monetary policy for FY 2019/20. However, the central bank had deferred this provision due to the COVID-19 pandemic.

Although the central bank had instructed banks to maintain a buffer capital of 0.5 percent by the end of the last fiscal year, it was not implemented due to a decrease in lending by the banks.

Banks currently under capital pressure will find relief as the buffer capital will not be implemented immediately. Currently, banks are required to maintain a minimum of 8.5 percent of Tier 1 capital and 2.5 percent of Tier 2 capital, totaling 11 percent of risk-weighted assets.

Additionally, Nepal Rastra Bank has allowed banks to calculate accrued interest on performing loans from the regulatory reserve as part of Tier 2 capital. Banks have also been granted the concession to classify loans up to Rs 20 million as micro, small, and medium enterprise (MSME) loans.

Furthermore, the central bank has provided the option to reschedule or restructure loans for up to three years for microfinance borrowers who are unable to regularize their loans due to external factors. Banks have been given until mid-January 2025 to complete restructuring. The central bank's instructions also mention that after restructuring the loan, the credit information center should be recommended to remove the borrower from the blacklist.