Nepal Rastra Bank revises policies amid Dashain, introduces new refinancing rules

KATHMANDU: Nepal Rastra Bank (NRB) has introduced key policy changes during the festive period of Dashain, with significant impacts on the country’s banking and financial sectors. As liquidity remains high in the banking system, NRB has moved forward with its refinancing policies, issuing new directives that broaden access to refinancing for businesses of all sizes, including micro, small, medium, and large enterprises.

The new refinancing guidelines, which come into effect immediately, are based on the “Refinancing Guidelines, 2077.” Under these guidelines, businesses can now access refinancing facilities up to five times their original loan amount, continuing a policy first implemented during the COVID-19 pandemic. However, concerns have been raised over the misuse of such facilities in the past, which led to reckless imports, capital flight, and significant pressure on Nepal’s foreign currency reserves.

Increased Liquidity and Foreign Currency Pressure

During the pandemic, refinancing was used excessively, leading to an increase in liquidity and pressure on foreign exchange reserves. To address these challenges, NRB and the government took several policy interventions, yet Nepal’s economy remains sluggish. With this latest move, there is concern that extending refinancing to all sectors may create additional risks for the future.

“While the central bank’s initiative aims to support businesses during these challenging times, the misuse of refinancing could exacerbate the existing pressure on foreign currency reserves and liquidity management,” said a prominent banking expert.

Loan Limits on Gold and Silver Collateral

One of the major policy changes includes the introduction of a single customer loan limit for gold and silver-backed loans, capped at NPR 5 million. This is a significant shift from previous regulations, where no such limit was imposed on loans backed by these precious metals. The new rule must be implemented by banks and financial institutions by the end of Ashad 2083 (July 2026).

This measure is seen as part of broader efforts to tighten lending practices and ensure better financial discipline across the banking sector.

Hydropower Projects and Loan Restructuring

In a separate move, NRB has also revised policies regarding hydropower projects. Many of these projects have faced operational delays due to the lack of transmission lines. NRB’s latest directive states that completed hydropower projects that are not yet operational due to infrastructure issues will no longer be eligible for loan restructuring or rescheduling. This change places additional pressure on the Nepal Electricity Authority (NEA) to expedite the construction of transmission lines, allowing these projects to operate at full capacity.

NRB’s amendments are expected to affect large hydropower projects with capacities exceeding 50 MW. For such projects, interest capitalization rules have been relaxed, allowing banks to exclude these interests from their earnings calculations, which is expected to boost banks’ profits.

Changes to Share Loan Provisions

NRB has made additional amendments to share loans. Banks are now required to monitor changes in share prices and inform borrowers if additional collateral is needed. Failure to provide the required collateral may result in the bank initiating a margin call or selling the shares to recover the loan. This is intended to safeguard banks and financial institutions from fluctuations in the stock market.

Strengthening Regulatory Framework for Financial Institutions

In an effort to further tighten oversight, NRB has mandated that banks and financial institutions follow the NFRS 9 Expedited Credit Loss Guideline, 2024, when recognizing interest income. Banks must also comply with Nepal Financial Reporting Standards (NFRS) when evaluating their employee liabilities. The central bank has retained previous rules that require banks to deposit interest income, after deducting taxes, employee bonuses, and contributions to corporate social responsibility funds, into regulatory reserves.

Implications for Foreign Joint Ventures

Foreign joint venture banks operating in Nepal must now seek approval under the Foreign Investment and Technology Transfer Act (FITTA), 2075, for technical agreements with foreign investors. This is a change from previous regulations that operated under the Foreign Investment and Technology Transfer Act, 2049.

Concerns Over Economic Stability

While NRB’s policies aim to stabilize the banking sector and support businesses, experts warn that some of the measures, particularly the broad access to refinancing, could lead to further economic instability.

“The extended refinancing facility may open the floodgates for misuse, similar to what happened during the pandemic,” cautioned an economic analyst. “With rising concerns over capital outflow and pressure on foreign currency reserves, careful monitoring will be essential to avoid long-term economic damage.”

With Nepal’s foreign exchange reserves already under strain and ongoing challenges in the banking sector, the central bank’s new policies will be closely watched by businesses, investors, and financial analysts alike.