26th February 2025, Kathmandu
Nepal Rastra Bank (NRB) has revised the monetary policy for the fiscal year 2023/24, introducing key changes to loan loss provisioning and investment limits. The mid-term review aims to ease financial pressure on banks and increase liquidity.
NRB Monetary Policy Review
Loan Loss Provisioning Reduced for Good Loans
NRB has lowered the loan loss provisioning requirement for good loans from 1.10% to 1.0%. This move is expected to provide banks with an additional NPR 4 billion for investment.
Previously, banks had to maintain a higher provisioning rate, increasing financial strain. The new policy offers relief by freeing up funds for lending and economic activities.
“The provisioning requirement for good loans has been reduced to 1.0% from 1.10%,” the NRB review states. This adjustment is expected to support economic growth by improving liquidity.
Flexible Investment in Non-Deliverable Forwards (NDF)
NRB has also relaxed restrictions on alternative investments. The cap on investments in Non-Deliverable Forwards (NDF) has been raised from 15% to 20% of a bank’s core capital.
This decision allows banks to invest more in alternative financial instruments. The move aims to address excess liquidity in the banking sector and encourage diversification of investments.
“The existing limit on NDF investments has been increased from 15% to 20%,” NRB stated in the review. This adjustment provides banks with greater flexibility in managing their investment portfolios.
Addressing Loan Recovery Challenges
NRB’s revision comes at a time when loan recovery has become a growing challenge. Rising non-performing loans (NPLs) have increased financial risks for banks. By reducing provisioning for good loans, NRB aims to balance liquidity while maintaining financial stability.
During the COVID-19 period, NRB had imposed stricter provisioning requirements. At one point, banks had to set aside 1.3% for good loans. The latest revision reverts the rate to pre-COVID levels, easing the financial burden on banks.
Impact on Banking and Economy
With these changes, banks will have more liquidity for lending and investments in productive sectors. The relaxed policies will help stimulate economic growth by encouraging more financial activities.
NRB’s mid-term review reflects a strategic approach to managing liquidity and supporting the financial sector. By lowering provisioning and allowing more investment flexibility, the central bank aims to ensure stability and growth in Nepal’s economy.
For more: NRB Monetary Policy Review