Nepal Rastra Bank announces regulatory relief to ease capital pressure on banks

KATHMANDU: Nepal Rastra Bank (NRB) has introduced a series of regulatory measures aimed at alleviating the pressure on banks and financial institutions’ capital reserves. This move comes in response to the economic slowdown, which has exerted significant strain on the capital bases of banks and financial institutions, impacting their lending capacity.

To address this issue, the NRB has reduced the provisioning requirement for performing loans. The current provisioning requirement of 1.20% for performing loans has been lowered to 1.10%. Additionally, the NRB is set to review the risk weightage applied to loan purchases and sales.

For banks and financial institutions with adequate capital reserves, the NRB is preparing to ease the risk weightage for loan purchases and sales conducted by banks with strained capital.

Furthermore, to resolve the capital reserve issues, the NRB has increased the regulatory retail portfolio limit from NPR 20 million to NPR 25 million. This increase is an additional NPR 5 million over the previous limit of NPR 20 million.

Last year’s monetary policy review had already raised the regulatory retail portfolio limit from NPR 10 million to NPR 20 million. The revised risk weightage for the regulatory retail portfolio is set at 75%, which is expected to reduce the risk weightage for banks and facilitate better capital management.

In addition, the NRB is making provisions to allow banks to count eligible reserve amounts in the regulatory reserve as part of their Tier 2 capital, aiming to avoid doubling capital requirements.

The NRB has also shown flexibility regarding the classification of non-performing loans. While loans that have been regular for six months cannot be classified as performing, they will be allowed to remain under close monitoring. This measure is expected to provide relief to banks by reducing the impact of bad loans on their profits and capital reserves.

Finally, if interest that matures by the end of Shrawan (mid-August) remains unrecovered, it will be considered as income for profit calculation purposes, according to the NRB’s new provisions.