Central bank releases semi-annual monetary review for current fiscal

KATHMANDU, FEBRUARY 25: Nepal Rastra Bank (NRB) has published its semi-annual monetary review for the ongoing fiscal year. Governor Maha Prasad Adhikari, in what marks the final monetary review of his tenure, has introduced certain relief measures for banks through the review. His term is set to conclude on Chaitra 25 (April 7, 2025). Over his tenure, he has introduced five monetary policies, and this review serves as his last.

In response to bank operators' demands, the NRB has reduced the loan loss provisioning requirement. Additionally, the review introduces a new provision linking microfinance institutions’ lending rates to the base rate, effective Jestha 2082 B.S. (mid-May to mid-June 2025). The cap on non-deliverable forward (NDF) transactions has also been increased from 15% to 20% of primary capital. Furthermore, the loan-to-value (LTV) ratio for both personal and electric vehicles has been set at 60%.

Key Policy Changes in the Review

1. Loan Loss Provisioning for Performing Loans Reduced to 1%
   Banks and financial institutions (BFIs) will now be required to maintain a 1% loan loss provision for performing loans, down from the previous 1.10%. This adjustment aims to ease the burden on BFIs, as rising non-performing loans (NPLs) and loan recovery challenges have already increased provisioning requirements for bad loans.

2. Banks Allowed to Hold Up to 20% of Primary Capital in Foreign Currency
   BFIs can now hold up to 20% of their primary capital in foreign currency under NDF transactions, an increase from the previous 15%. The review states:
   "For non-deliverable forward transactions, the existing 15% limit on primary capital will be increased to 20%."

3. Microfinance Institutions Must Set Interest Rates Based on the Base Rate
   Starting Jestha 2082 B.S., microfinance institutions will also be required to determine their lending rates based on the base rate. Previously, this rule did not apply to such institutions. As a result, NRB has issued a directive capping microfinance loan interest rates at 15%. Once the new provision comes into effect, this cap will be removed.

4. Loan-to-Value (LTV) Ratio for Vehicle Purchases Set at 60%

• Electric Vehicles: Banks and financial institutions will now provide loans covering up to 60% of an electric vehicle's market value, reduced from the previous 80%.
• Non-Electric Personal Vehicles: The LTV ratio for other personal vehicles has also been set at 60%, an increase from the previous 50%.

No Changes to Core Monetary Policy Rates

NRB has noted that financial conditions have improved in the second quarter of 2024/25. As a result, the central bank has kept key policy rates unchanged to support economic activity:

• Policy Rate: 5.0%
• Deposit Collection Rate (Lower Bound of Interest Rate Corridor): 3.0%
• Bank Rate (Upper Bound of Interest Rate Corridor): 6.5%
• Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) remain unchanged.