NRB Issues Circular to Boost Banks' Lending Capacity by Reducing Counter-Cyclical Buffer to Zero Percent

Nepal Rastra Bank has issued a new circular designed to increase the lending capacity of banks. The circular, released today, stipulates that the counter-cyclical buffer will be set at zero percent for the current fiscal year, thereby enhancing the ability of banks to extend credit.

With this change, banks are now required to maintain a Capital Adequacy Ratio (CAR) of 11 percent and a Tier 1 Capital (CCAR) of 8 percent. This adjustment provides banks with greater capacity to issue loans.

This measure offers substantial relief to banks with constrained Tier 1 Capital, such as NIC Asia, Nabil, Kumari, and Kamana Sewa, enabling them to increase their lending activities. By allowing banks to make more efficient use of their deposits, this regulation is expected to reduce costs and potentially lead to lower interest rates.

Previously, the counter-cyclical buffer was set at 0.5 percent, which had constrained the lending capacity of some banks, despite their holding sufficient deposits. This new arrangement is intended to allow banks to expand their lending capabilities and better support economic growth.

What is a Counter-Cyclical Buffer in a Simpler Term?

The counter-cyclical buffer is a financial regulation tool used by central banks to protect the banking system during periods of economic fluctuations. Here's how it works:

- During Economic Booms: When the economy is doing well, and credit is growing rapidly, banks are required to hold extra capital as a safety measure. This extra capital is called the counter-cyclical buffer. It helps to prevent banks from lending too much, which can lead to risky financial bubbles.

- During Economic Downturns: When the economy slows down or enters a recession, the central bank can reduce or remove this buffer. This reduction allows banks to use the extra capital they were holding to continue lending, even during tough times. This helps to support the economy by making it easier for businesses and individuals to get loans when they need them most.

In summary, the counter-cyclical buffer is a way to help ensure that banks are strong enough to weather economic ups and downs, promoting stability in the financial system.