NRB slashes interest rates, promotes housing and share market growth

Kathmandu, July 12: The Nepal Rastra Bank (NRB) unveiled the Monetary Policy for the upcoming Fiscal Year 2025/26 on Friday with measures to expand private sector credit, manage non-performing loans (NPLs) and non-banking assets, and promote the share market. 

Amidst growing liquidity in the Banks and Financial Institutions (BFIs), the NRB has announced to adjust the bank rate from 6.5 per cent to 6 per cent and deposit collection rate to 2.75 per cent from the existing 3 per cent. Likewise, the policy rate is dropped to 4.5 per cent from the current 5 per cent, Governor of the NRB, Dr. Biswo Nath Poudel said while unveiling the Monetary Policy.  

Lowered bank rate facilitates easier borrowing from banks, while the decreased policy rate reduces the cost of credit in the economy. Adjustment in deposit rate means less incentive to save and more incentive to invest or spend. Combined, these steps can result in more liquidity in the market, higher demand and inflation. 

However, the central bank is confident that these steps will help in encouraging banks to lend more to businesses and individuals, reduce lending rates, and make the home, business and personal loans cheaper, and there wouldn't be the risk of high inflation. 

"The inflation rate is a very comfortable position in mid-May to mid-June at 2.72 per cent compared to 4.17 per cent during the same period last year. Since there is room for some inflation, the interest rate moderation will not disturb this harmony and significantly push the prices up," NRB Spokesperson Kiran Pandit said at a post-Monetary Policy press meet held at the central bank on Friday. 

He said that the interest rate corridor has been moderately brought down to boost economic activities and help the market become more vibrant. 

Likewise, the NRB has adopted a flexible policy in real estate lending, with the maximum limit for residential home loans granted to individuals for purchasing a house increased to Rs. 30 million from the existing Rs. 20 million.

For first-time homebuyers, banks will now be allowed to provide residential loans of up to 80 per cent of the property’s assessed value, up from the earlier cap of 70 per cent. Similarly, the loan-to-value ratio for land and property purchases has also been increased to allow the BFIs to finance up to 70 per cent of the assessed value. Currently, they are permitted to lend up to 50 per cent. 

Margin lending limit raised 

Governor Dr. Poudel has increased the limit on margin lending. The ceiling of Rs. 150 million for personal share-backed loans has now been raised to Rs. 250 million. With the implementation of this provision, individuals can now obtain loans of up to Rs. 250 million in total from various banks and financial institutions by pledging shares as collateral. This measure, combined with the decreased interest rates, can drive a share market growth. 

Likewise, the cap on deposit mobilisation for finance companies has been removed, allowing them to mobilise deposits beyond the current provision of 15 times their core capital. It is likely to attract more deposits to the finance companies and have a positive impact on the prices of their shares. 

The NRB has also indicated that the microfinance companies can distribute dividends above the current limit of 15 per cent from their profits. This will also take the share prices of the class 'D' microfinance institutions up in the  days to come. 

Capital increase for commercial banks

Commercial banks will now be allowed to increase their capital with the approval of the central bank. The BFIs will be permitted to count the regulatory reserves generated from non-banking assets held for up to two years towards their supplementary capital.

The Governor announced that the new monetary policy aims to strengthen the capital base of banks further. However, the banks should obtain approval from the central bank for the capital increment plan. 

Likewise, necessary arrangements will be made for the effective implementation of the concessional loan mentioned in the government's budget statement for the fiscal year 2025/26. 

"Laws and regulations will be drafted and submitted to the government to allow BFIs to establish asset management companies for the purpose of managing their non-performing assets. Process would be initiated to establish a Neo Bank with an aim to expand the financial inclusion as envisioned by the budget of the government," read the Policy. 

Loan to migrant workers to be 'deprived sector'

It announced a new provision would be made to count the loan (with or without collateral) up to Rs. 300,000 mobilised to youth going for foreign employment as 'deprived sector lending'. Such an amount for women going for jobs abroad could be up to Rs. 500,000. 

Likewise, standards on target groups, loan receiving and creditors' qualifications for microfinance institutions would be reviewed. The amount of foreign currency that Nepali citizens are allowed to carry while travelling abroad has been increased to USD 3,000.

The central bank will launch a new programme titled 'Nepal Rastra Bank with Borrowers' with an aim to listen to borrowers' grievances. This initiative will be implemented particularly in the rural areas to engage continuously with borrowers.

According to Governor Dr. Poudel, the NRB will coordinate with relevant government agencies to address risks arising from undesirable activities encountered when banks and financial institutions carry out loan recovery or regularise loans in accordance with existing legal procedures.

Concession to mid-hill businesses 

In a new move, the central bank has announced a concessional loan to the businesses along the Mid-Hill Highway and Postal Highway at a base rate plus 2 per cent interest rate. However, to get this facility, the businesses must be registered with the government and met all quality standards prescribed. 

Similarly, BFIs would be allowed to mobilise agriculture or business loans of up to Rs. 1 million by evaluating agriculture yield, land and business structure by themselves. 

Speaking at the press meet, Executive Director of the NRB, Guru Prasad Poudel, said that the mid-hill region could not contribute to the economic activities as expected so the new measures were announced to increase business activities there.