Significant Banking Reforms: Nepal Rastra Bank Introduces Sweeping Policy Changes to Enhance Financial Stability and Access

In a series of strategic moves, Nepal Rastra Bank has introduced a range of policy revisions aimed at fortifying the country's financial sector and promoting responsible lending and investment practices. These significant changes touch upon various aspects of banking and finance, ranging from Non-Performing Loan (NPL) policies to margin requirements for securities loans, and even measures to encourage lending in critical sectors.

Here, we delve into the key highlights of these recent policy changes that promise to reshape Nepal's financial landscape.

1. Change in Non-Performing Loan (NPL) Policy

Nepal Rastra Bank Implements Partially Positive Changes in NPL Policy

In a recent move, Nepal Rastra Bank has made significant changes to its Non-Performing Loan (NPL) policy. The key alteration involves reducing the permissible NPL ratio from 1.30% to 1.25%. This change is expected to bolster the financial stability of banks by ensuring stricter control over loan defaults. Consequently, the banking sector is poised to see a reduction in bad debts, with a notable decrease in non-recoverable loans.

2. Revision of Loan-to-Value (LTV) Ratio

Loan-to-Value Ratio Revised to 50% by Nepal Rastra Bank

Nepal Rastra Bank has introduced significant amendments to the Loan-to-Value (LTV) ratio for personal loans. The new policy stipulates that loans exceeding NPR 5 million must maintain a Loan-to-Value ratio of 50%. Previously, this ratio stood at 30% within the Kathmandu Valley and 40% for loans outside the valley. This change is expected to increase the prudence in lending practices and mitigate risks associated with higher-value loans. When real estate loans have lower risk profiles, it'll make housing and property-related businesses more stable and robust.

3. Interest Rate on Specific Categories of Loans

Interest Rate Differential Widened for Certain Loan Categories

Nepal Rastra Bank has issued a directive to banks to maintain an interest rate differential of at least 2% between specific categories of loans. This measure aims to make borrowing more affordable for customers while providing financial institutions with a clearer incentive to lend in certain sectors.

4. Relaxation of Credit Rating Requirements for Certain Institutions

Credit Rating Requirement Relaxed for Microfinance Institutions

Nepal Rastra Bank has exempted microfinance institutions from undergoing a credit rating assessment for loans up to Rs. 50 Crores. This move is expected to streamline the operations of microfinance institutions and reduce their compliance burden. It is anticipated that this policy will enable these institutions to allocate more resources to serve their clients efficiently.

5. Margin on Shares and Securities-based Loans

Nepal Rastra Bank Increases Margin Requirement on Securities Loans

Nepal Rastra Bank has increased the margin requirement for loans secured by shares and securities. Under the new policy, individual loans must maintain a margin of NPR 15 Crores, while institutional loans require a margin of NPR 20 Crores. This marks a significant rise from the previous margin requirements of NPR 12 Crores. The decision comes in response to mounting pressure from investors in the stock market who had been advocating for the removal of the existing cap on margin lending, citing its detrimental impact on the share market

6. Dormant Account Management

Change in Dormant Account Policy: Accounts Inactive for Over One Year to Be Declared Dormant

Nepal Rastra Bank has made alterations to the dormant account policy, specifying that accounts with no activity for more than one year will be declared dormant. Previously, the threshold for dormancy was six months. This change is expected to simplify banking operations and reduce the administrative burden associated with managing dormant accounts.

7. Deposit Collection Limits for Development Banks

Deposit Collection Limits for Development Banks Relaxed

Nepal Rastra Bank has removed the limit on deposit collection for development banks. Previously, these banks were subject to a deposit collection limit of 20 times their primary capital. This change is expected to provide greater flexibility to development banks in mobilizing funds and meeting the financial needs of their clients.

8. One-Year Time Limit for Investment in Designated Sectors

One-Year Time Limit for Investment in Designated Sectors Introduced

Nepal Rastra Bank has introduced a one-year time limit for investments in designated sectors. As per Directive 17, the stipulated time for completing investments in designated sectors has been extended to one year. This change allows banks to avoid immediate penalties and provides them with an additional year for compliance, making the process more manageable.

9. General Person's Savings up to Rs. 5 Lakhs to Be Secured with Loans and Deposit Protection Fund

NRB has mandated that savings of up to Rs. 5 Lakhs held by general persons must be protected with loans and deposit gurantee funds. This measure aims to ensure the safety of individuals' savings and deposits while facilitating responsible lending practices by financial institutions. 

As a result of this policy, there will likely be an increase in banks' operational expenses due to the enhanced protection of deposits. However, this move is expected to bolster customer confidence, promote financial stability, and encourage responsible banking practices. The growth of loan portfolios, as well as the profitability of the deposit protection fund, is anticipated to improve as a consequence of this regulation.

10. Verification of Bank Guarantees Through Online Platform

Nepal Rastra Bank Introduces Online Verification of Bank Guarantees

Nepal Rastra Bank has launched an online platform for the verification of bank guarantees. This initiative is aimed at preventing the issuance of fake bank guarantees, ensuring transparency, and enhancing the overall security and trustworthiness of financial transactions in Nepal.

11. Personal Higher Purchase and Auto Loans Face Decreased Risk Weight

Nepal Rastra Bank Reduces Risk Weight to 125% for Personal Higher Purchase and Auto Loans Above Rs 25 lakhs

Nepal Rastra Bank has introduced a significant policy shift by reducing the risk weight for personal car loans. Previously, the risk weight for car loans above Rs. 25 lakhs was 150 percent, but now it has been reduced to 125 percent. The move is anticipated to provide individuals with more flexible and cost-effective financing options for personal higher purchases and auto loans. 

12. Implementation of Counter-Cyclical Buffer

Nepal Rastra Bank Enforces 0.50% Counter-Cyclical Buffer from FY 2080/81

In compliance with the directive, Nepal Rastra Bank has enforced the Counter-Cyclical Buffer at a rate of 0.50%. The commercial banks will have to maintain their counter-cyclical buffer to 0.5 percent by the end of this fiscal year. This strategic move is aimed at fortifying the banking sector's resilience against economic fluctuations.

However, it's important to note that while this measure is intended to enhance financial stability, it may entail some constraints on the operational capacities of banks. This includes the need for banks to allocate a certain portion of their capital to build a buffer that can be deployed during periods of economic distress. While this ensures a more resilient banking sector, it may potentially limit the resources available for lending and investment, which could have an impact on the overall business activities of banks.

13. Concessional Interest Rate for Specific Sectors

Nepal Rastra Bank Offers 10% Interest Rate Subsidy for Education, Health, and Disaster-affected Projects

In a bid to boost sectors critical to national development, Nepal Rastra Bank has announced an interest rate subsidy of 10% for loans extended to projects in the education, health, and disaster-affected sectors. This policy aims to promote investment in areas that directly impact the well-being and progress of the country. The subsidized interest rates are expected to facilitate the revitalization and growth of these crucial sectors.

14. Nepal Rastra Bank Mandates PAN for Fixed Deposits Above Rs 50 Lakhs

Nepal Rastra Bank has made it mandatory to provide a Permanent Account Number (PAN) for fixed deposits exceeding Rs. 50 lakhs. This requirement is part of the revised regulations issued by the central bank, amending the Unified Directives 2079. According to the amended rules, banks and financial institutions falling under categories 'A,' 'B,' and 'C' must now request PAN when accepting fixed deposits exceeding Rs. 50 lakhs from eligible institutions. In such cases, depositors' PAN numbers are required for record-keeping.

Conclusion:

These recent policy changes by Nepal Rastra Bank signify a proactive approach to enhancing the stability and resilience of the country's financial sector. The revisions in NPL policy and Loan-to-Value ratios aim to mitigate risks and ensure responsible lending practices. Additionally, the widening of interest rate differentials and the exemption of microfinance institutions from credit rating requirements demonstrate a commitment to making borrowing more affordable and streamlining operations for institutions. The increased margin requirements for securities loans and the online verification of bank guarantees address concerns in the investment and security sectors.

Furthermore, the extension of dormant account policies, removal of deposit collection limits for development banks, and the introduction of a one-year investment time limit contribute to simplifying banking operations and promoting financial inclusion.

Overall, these measures align with Nepal Rastra Bank's objectives of fostering financial stability, protecting savings, and facilitating responsible lending and investment practices in the country.