NRB cuts rates through monetary policy review, raises loan limits

Kathmandu, Dec. 2: The Nepal Rastra Bank (NRB) has announced key monetary policy adjustments aimed at gradually narrowing the gap between the lower and upper limits of the interest rate corridor while keeping the policy rate at the midpoint to maintain a symmetric structure.

Unveiling the first-quarter review of the monetary policy for fiscal year 2025/26 on Monday, the central bank reduced the policy rates from 4.50 per cent to 4.25 per cent.

The Standing Liquidity Facility (SLF) rates—the upper boundary of the interest rate corridor—has been lowered from 6 per cent to 5.75 per cent, while the standing deposit facility rate, the lower limit, remains unchanged at 2.75 per cent. 

The existing provisions regarding the Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR) have also been kept intact.

With the reduction in the policy rates, banks are expected to face pressure to further reduce lending and deposit rates.

In a notable regulatory change, the central bank has scrapped the existing provision requiring banks and financial institutions to keep institutional fixed deposit rates at least 1 percentage point lower than personal fixed deposit rates.

With this provision, banks and financial institutions will now be able to offer equal interest rates on institutional and individual term deposits.

Personal overdraft limit doubled to Rs. 10 million

The NRB has also introduced a policy to double the existing limit of personal overdraft loans provided by banks and financial institutions.

The policy has been taken to increase the existing limit of personal overdraft loans provided by banks and financial institutions from Rs. 5 million to Rs. 10 million.

The central bank has increased the personal overdraft loan limit after banks and financial institutions had sufficient liquidity and the demand for loans remained low.

Microfinance loan ceiling raised Similarly, the maximum limit of loans that microfinance institutions can provide against collateral has been increased.

Reviewing the first quarter of monetary policy, the NRB has increased the maximum limit of loans that microfinance institutions can provide against collateral to Rs. 1.5 million. 

Earlier, microfinance was allowed to provide loans against collateral only up to Rs. 700,000.

Similarly, the NRB said that arrangements will be made to revise the loan repayment schedule, taking into account the problems faced by borrowers who have received loans from microfinance institutions in repaying their loans.

The NRB has made arrangements to provide loan rescheduling facilities to industrialists and businessmen affected by the floods and landslides that occurred in mid-October.

For enterprises/businesses in Ilam, which were affected by the recent floods and landslides, and other districts affected by natural disasters, a one-time loan rescheduling facility has been provided by charging a minimum of 10 per cent interest on the outstanding loan, according to the provision.

Branch consolidation allowed without NRB approval

Similarly, banks and financial institutions can now adjust and consolidate their branches in the metropolis without seeking permission from the central bank.

The NRB said that in the context of increasing digital transactions and significant number of branches of banks and financial institutions in the metropolis, arrangements will be made for banks and financial institutions to adjust/consolidate their branches in the metropolis themselves.

Arrangements will be made regarding the Anti-Bribery and Corruption Policy to enhance transparency, accountability, and good governance in banks and financial institutions, keeping in mind international best practices and internally developed practices, said the NRB.

The NRB said that the revised regulatory measures are in line with its cautious and flexible approach to implementing monetary policy for the current fiscal year, considering inflation trends, foreign exchange reserves, and overall economic conditions.

The NRB expects that the monetary policy for the current fiscal year and the arrangements made in the first quarterly review will help maintain price, external, and financial sector stability and support the expansion of economic activity.

The central bank estimates that the economy will gradually strengthen due to the policy efforts made by the government formed after the Gen Z movement to strengthen good governance and create a business-friendly environment, and the monetary easing adopted by the NRB.

Meanwhile, additional 309.2 MW of hydropower has been connected to the national transmission line in the first quarter of the fiscal year 2025/26.

Overall, the NRB's initial estimate is that economic growth for the current fiscal year will be slightly below 

the target. The average consumer inflation in the fiscal year 2025/26 is projected to be around 4 per cent.

The banking sector continues to be characterised by excess liquidity and low interest rates.