Nepal Rastra Bank Issues Circular to Implement Provisions of Monetary Policy FY 2081/82

The Nepal Rastra Bank (NRB) has issued a circular to implement provisions announced in the monetary policy for the fiscal year 2081/82 BS. This circular aims to enforce several measures outlined in the new monetary policy.

As per the new provisions, banks and financial institutions are required to set aside 1.1% as provisions for good loans starting this fiscal year. This is a reduction of 0.1% from the previous rate of 1.2% applicable until the last fiscal year.

Although banks had anticipated the implementation of this provision from the last fiscal year, the central bank has clarified that it will be effective only from the new fiscal year. Consequently, this change will not impact the profits of banks for the previous fiscal year.

Under the new provisions, loans and bills classified as good will now require a provisioning of 1.1% based on the outstanding principal amount.

Additionally, banks will no longer be able to write back non-performing loans (NPLs) immediately after they become regular. The monetary policy had announced that once an NPL is regularized, it can be categorized under the micro-watch list and only 5% provisioning is required. Banks had expected to write back these loans from the current fiscal year. However, the central bank has maintained that the write-back can only occur after a period of six months, thus not immediately increasing the profits of banks.

In essence, banks were allowed to write back provisions made before the end of Poush 2080 by the end of Ashad, but provisions made afterward cannot be shown as write-back in the balance sheet of the last fiscal year.

Nevertheless, if additional provisions are required, they can be made immediately. According to NRB regulations, any loan classified under the non-performing category (excluding restructured and rescheduled loans) must be upgraded to the good category after six months of being classified under the micro-watch list, provided the overdue principal amount is paid and the installments or interest are regularized.

For loans that remain in the non-performing category with partial payment of installments and interest, the provisions can be upgraded within the same category, and the corresponding loan loss provision should be maintained accordingly.

This new circular from NRB aims to enhance the stability and health of the banking sector by ensuring prudent provisioning and careful monitoring of loan classifications.