Nepal Rastra Bank (NRB) has published the New Monetary Policy for Fiscal Year 2082/83 with a focus on economic stability, financial sector reform, and inflation control. This policy aims to revitalize economic growth, ensure macroeconomic balance, and strengthen the financial system amidst ongoing internal and external challenges.
What is the Monetary Policy of Nepal?
Monetary policy refers to the guidelines and strategies implemented by Nepal Rastra Bank (NRB) to regulate money supply, interest rates, inflation, and liquidity in the economy. It plays a crucial role in ensuring price stability and promoting sustainable economic growth.
Direction of the Monetary Policy for FY 2082/83
- Stimulate the economy considering the current state
- Stabilize the exchange rate and foreign reserves
- Reduce the cost of capital formation for the private sector and the internal borrowing cost for the government Encourage lending in productive sectors.
- Maintain financial stability, improve access to and quality of credit, and reduce credit concentration
Structure and Objectives of the Monetary Policy
For the fiscal year 2082/83, the monetary policy aims to:
· Maintain inflation around 5.0%,
· Ensure foreign exchange reserves sufficient to cover at least seven months of goods and services imports, and
· Support achieving the government's targeted economic growth rate of 6.0% as stated in the budget.
The projected growth in broad money supply is 13.0%, while private sector credit growth is expected to be up to 12.0%.
Interim and Operating Targets
The fixed exchange rate of the Nepalese Rupee with the Indian Rupee has been retained as the interim target of the monetary policy.
The weighted average interbank rate of banks and financial institutions remains the operational target, and open market operations based on automatic and rule-based frameworks will be continued.
Monetary Instruments
The following changes have been made to the interest rate corridor:
The bank rate, which is the upper limit of the interest rate corridor, has been reduced from 6.5% to 6.0%.
The deposit collection rate, which is the lower limit, has been reduced from 3.0% to 2.75%.
The policy rate has been reduced from 5.0% to 4.5%.
The existing facility of Standing Liquidity Facility (SLF) at the bank rate has been continued.
The existing provisions related to the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) remain unchanged.
To ensure effective management of structural liquidity within the banking system, Nepal Rastra Bank (NRB) will issue NRB bonds as needed.
Systemic reforms will be introduced to make interbank transactions among banks and financial institutions more organized and transparent, enabling NRB to monitor transactions in real-time.
Financial Sector and Foreign Exchange Policies for FY 2082/83
Financial Stability and Credit Management
Although the economy has gradually started to recover, non-performing loans (NPLs) and non-banking assets have increased in banks and financial institutions.
This has created pressure on the capital base, thereby affecting their lending capacity. The number of borrowers being blacklisted has also been increasing.
Thus, key priorities include:
· Enhancing banks’ and financial institutions’ lending capacity
· Simplifying credit management
· Strengthening capital adequacy
· Ensuring financial stability
Additionally, establishing an asset management company has been prioritized to manage non-performing loans and non-banking assets of banks and financial institutions.
Responsible Lending and Technological Adaptation
The excess liquidity and low interest rates in the banking system present an opportunity for the economy. To make the most of this, banks and financial institutions should adopt self-regulation when lending and prioritize thorough evaluation of the borrower’s project, knowledge, skills, and capacity.
To maintain financial stability, international regulatory standards will be implemented. Gradually, additional restrictive regulations will be relaxed, while risk-based supervision will be prioritized. Banks and financial institutions must take greater responsibility in credit-related decisions.
With the rapid advancement and use of technology, the financial system has entered a new phase. Banks and financial institutions must adopt modern technology and utilize new skills, capabilities, and opportunities in the sector.
To improve access and competitiveness in financial products, institutional diversity will be encouraged, and banks and financial institutions will be motivated to provide specialized services.
Policy Coordination with Monetary Direction
The policies related to prudent regulation, foreign exchange management, payment systems, and anti-money laundering have been aligned with the monetary policy direction of FY 2082/83.
Regulation and Supervision
Addressing Opportunities and Challenges in the Financial System
To ensure sustainable development and expansion of the financial system, the Second Financial Sector Strategy approved by the Government of Nepal will be implemented, addressing existing opportunities and challenges.
Revision in Housing Loan Limits
The loan limit for private residential home construction/purchase has been increased from Rs. 2 crore to Rs. 3 crore.
For first-time homebuyers, the loan-to-value (LTV) ratio can be up to 80%, while for others, it will be a maximum of 70%.
Guidelines for Working Capital Loans
The guidelines for working capital loans will be revised based on:
The nature of businesses (agriculture, small and cottage industries, education, health, sports, communication, and media houses).
Loan repayment cycles and income patterns.
Review of Loan Classification and Provisioning
Existing loan classification and provisioning policies will be studied and revised as necessary.
Credit Facilitation for Agriculture and Small Businesses
To improve the living standards of low- and middle-income households, the following provisions will be implemented:
(a) Agricultural Loans
Banks and financial institutions (BFIs) can provide agricultural or business loans up to Rs. 10 lakh by self-valuing crops, agricultural land, and agri-business structures.
A minimum provisioning requirement will apply to such loans during the grace period.
(b) Simplified Loan Processes for Agri-Businesses
BFIs can provide flexible loan terms aligned with crop cycles and production for:
Food grains, crops, livestock, poultry, fish farming, and related agri-businesses.
Loan processes will be further simplified, and effective monitoring will be ensured.
(c) Incentives for High-Yield Crops
Loans for high-yield crop production (recommended by the Nepal Agricultural Research Council - NARC) will be facilitated.
Support for Highway-Based Businesses
To promote businesses along Hulaki Highway and Mid-Hill Highway, the following provisions apply to Hotels and restaurants certified with food hygiene grading (logo/sign) by the Department of Food Technology and Quality Control andIndustries and businesses near major highway markets.
a) Loans up to Rs. 3 crore for such businesses will be categorized under small and medium enterprises (SMEs).
b) The interest rate on these loans will be capped at a maximum of 2 percentage points above the base rate.
Loan Restructuring in Earthquake-Affected Areas (Jajarkot, Rukum)
For business loans and individual loans with projects in earthquake-affected areas, Banks and financial institutions (BFIs) may restructure/reschedule these loans after analyzing the borrower's cash flow and income. At least 10% of the payable interest must be recovered before restructuring.
Review of Interest Capitalization in Energy Sector Loans:
The policy on interest capitalization for loans in the energy production sector will be reviewed.
Increase in Margin Lending Limit:
The single-customer exposure limit for margin loans (backed by shares as collateral) will be increased from Rs. 15 crore to Rs. 25 crore.
Easing Check Dishonor (Bounced Checks) Policies:
The existing blacklisting rules for check dishonor cases will be relaxed for policy facilitation.
Strengthening Banking Sector Regulations
Risk-Based Supervision (RBS):
To make the banking sector more competitive, disciplined, and responsible, reforms will be made in lending, interest rates, and macro-prudential regulations, while enhancing risk-based supervision.
Asset Quality Review (AQR):
An Asset Quality Review (AQR) will be conducted to improve the quality of commercial banks' assets.
Liquidity Risk Management:
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) will be effectively implemented to reduce liquidity risks. The loan-to-deposit ratio (LDR) regulatory framework will be reviewed after implementation.
Domestic Systemically Important Banks (D-SIBs):
Banks identified as systemically important (D-SIBs) will be subject to stricter regulations and supervision. A Domestic Systemically Important Bank (D-SIB) Framework will be issued and enforced.
Internal Liquidity Adequacy Assessment Process (ILAAP):
Guidelines for ILAAP will be issued to strengthen liquidity risk management in commercial banks.
Loan Restructuring for Real Estate & Construction Firms:
Registered and operational land development and construction firms approved by the Government of Nepal will be facilitated in loan restructuring/rescheduling.
Regulations for Hire Purchase Companies:
The approval process for hire-purchase loan companies will be revised, including:
a) "Fit and Proper" Test for management.
b) Interest rate calculations and service charges.
Infrastructure Investment Entities:
Institutions established for infrastructure investment (as designated by the Government of Nepal) will be supported under regulatory frameworks. Banks and financial institutions (BFIs) will be permitted to invest in debentures issued for fundraising purposes.
Capital Adequacy & Deposit Operations for Finance Companies
"B" Class Development Banks and "C" Class National-Level Finance Companies have been complying with Basel II & III capital adequacy ratios and other regulatory requirements for a long time.
For "C" Class Finance Companies:
The limit on deposit operations (up to 15x primary capital) will be removed to enhance their operational flexibility.
Treatment of Non-Banking Assets
BFIs can include Regulatory Reserves (created from non-banking assets) in Supplementary Capital for up to two years after asset realization.
Capital Enhancement Facilitation
BFIs will be allowed to increase their capital as needed, subject to approval from Nepal Rastra Bank (NRB), to strengthen their financial base.
Implementation of Budgetary Provisions (FY 2082/83)
Concessional Loan Schemes
Effective implementation of subsidized loan programs mentioned in the Government of Nepal’s FY 2082/83 Budget Statement will be facilitated.
Remittance & Digital Payment Integration
Encouraging remittance inflows into the formal financial system and directing them toward productive sectors. Mandating all public sector payments to be processed through electronic payment systems.
Asset Management Company (AMC) Establishment
A draft Act and Regulations for setting up an Asset Management Company (AMC) will be prepared and submitted to the Government of Nepal to help BFIs manage non-performing loans (NPLs) and distressed assets.
Prompt Corrective Action (PCA) Framework Review
The Prompt Corrective Action (PCA) Regulations will be revised to identify and take corrective measures for troubled BFIs more effectively.
Base Rate Calculation Methodology
The base rate calculation method for BFIs will be revised to make it more realistic and transparent.
Financial Inclusion & Structural Reforms
Introduction of "Neo Banks" (Digital Banks)
As per the FY 2082/83 Budget Statement, legal and procedural frameworks will be developed to establish "Neo Banks" to expand financial access.
Review of Branch Expansion Policy
With the strengthening of digital payment systems, the existing branch expansion policy for BFIs will be reviewed.
Reclassification of Financial Institutions
A detailed study will be conducted to reclassify BFIs and revise their operational scope, considering:
a) Past challenges and emerging needs.
b) The need for better resource allocation in priority sectors identified by the state.
Credit Scoring-Based Lending
BFIs will adopt policies to provide loans based on customers' credit scores, promoting risk-based lending practices.
Financial Sector Reforms (Continued)
Dividend Distribution Cap for Microfinance Institutions (MFIs)
The existing 15% annual dividend distribution cap (cash or bonus) for MFIs will be reviewed.
Loans for Youth Going for Foreign Employment
Loans up to Rs. 300,000 (with or without collateral) for youths seeking foreign employment will be classified as "deprived sector lending."
For women borrowers, this limit will be increased to Rs. 500,000.
Targeted Lending by Microfinance Institutions
Eligibility criteria and loan targeting mechanisms for MFIs will be revised to ensure:
a) Loans reach the intended beneficiaries
b) Productive use of credit is maximized.
Review of Deprived Sector & Directed Lending Policies
The loan limits and policies for deprived sector and priority sector lending by BFIs will be studied and revised.
Foreign Exchange Management
Foreign Exchange Risk Management for FDI
Commercial banks will be allowed to offer foreign exchange hedging services to attract foreign investment.
Amendment to Foreign Investment & Loan Management Regulations
The "Nepal Rastra Bank Foreign Investment and Foreign Loan Management Regulations, 2078" will be amended to:
a) Improve the business and investment climate.
b) Facilitate greater foreign investment inflows.
Easing Repatriation for Foreign Investors
Foreign investors, foreign-invested companies, and branch/liaison offices in Nepal will get easier repatriation of:
a) Capital
b) Interest
c) Dividends
d) Customs declaration limits for foreign cash holdings will be reviewed.
e) Reporting requirements for foreign currency holdings by Nepali citizens/institutions abroad will be simplified.
Gold Import & Distribution Policy Review
The existing gold import and distribution system will be reviewed in coordination with the Government of Nepal, based on study reports and recommendations.
Increase in Non-Deliverable Forward (NDF) Exposure Limit
The capital requirement limit for Non-Deliverable Forwards (NDFs) will be increased from 20% to 25% of primary capital.
Increased Forex Facility for Travelers
The forex facility for Nepali citizens traveling outside India will be increased from USD 2,500 to USD 3,000 per trip.
Remittance Sector Reforms
A study will be conducted to classify such companies based on capital and transaction volume considering the growing contribution of remittance companies to the economy.
Foreign Exchange Management
Bangladeshi Taka and Sri Lankan Rupee will be added to the list of convertible foreign currencies, as trade in these currencies has been increasing.
The exchange rate (Fedai rate) used in remittance transactions will be reviewed and adjusted as needed.
A policy framework will be introduced for interbank transactions in convertible foreign currencies.
Payment System Modernization
Development of Secure & Efficient Payment Systems
Digital payment infrastructure will be strengthened to enhance financial access and electronic transactions.
National Payments System Strategy Review
The National Payments System Development Strategy will be reviewed and updated to align with current needs.
Digital Lending Guidelines for SMEs
Digital Lending Guidelines will be revised to facilitate collateral-free, transaction-based loans for small, medium, and micro enterprises (SMEs).
Regulatory Sandbox for Fintech Innovation
A Regulatory Sandbox will be launched to promote innovation in payment systems, ensuring security and efficiency.
Risk-Based Supervision of Payment Operators
Payment service providers will be subject to risk-based inspection and supervision.
Framework for Systemically Important Payment Systems (SIPS)
A framework to identify and monitor Systemically Important Payment Systems (SIPS) will be introduced to ensure financial stability.
Anti-Money Laundering (AML) & Counter-Terrorism Financing (CTF)
Nepal’s Exit from FATF Grey List
Enhanced coordination among agencies will ensure full implementation of Nepal’s action plan to exit the FATF Grey List. Monitoring, investigation, and enforcement of AML/CFT measures will be strengthened.
Implementation of APG Recommendations
Priority Actions and Recommended Actions from the Asia Pacific Group (APG)’s Mutual Evaluation Report will be implemented in coordination with regulatory bodies.
Automation of Financial Intelligence
Financial Intelligence Unit (FIU) reporting will be automated to improve the effectiveness of financial crime investigations.
Financial Inclusion and Consumer Protection
Banks, financial institutions, and other financial service providers will be facilitated to obtain customer identification (KYC) information through the National Identity Card.
Once a customer updates their information at one bank, necessary institutions will be enabled to access that data electronically through the development of a digital infrastructure.
To maintain continuous engagement with borrowers in rural areas, a program titled "With the Borrower — Nepal Rastra Bank" will be launched.
In cases where banks and financial institutions regularize loans or initiate recovery proceedings under the prevailing legal framework, necessary coordination will be done with relevant government authorities to mitigate risks arising from undesirable activities during the process.
Given the significant number of inactive bank accounts and the risk posed by the practice of others operating these accounts (known as Money Mule activities), a strategic plan will be implemented to reduce inactive accounts.
To protect financial consumers, “Financial Consumer Protection Guidelines” and Directives on Financial Market Conduct will be issued.
Conclusion
The implementation of this monetary policy is expected to promote price and external sector stability, ensure financial stability, strengthen overall macroeconomic stability, make financial intermediation more effective, enhance financial inclusion, modernize and secure the payment system, and support the economic goals of the Government of Nepal.