9th October 2025, Kathmandu
The Nepal Rastra Bank (NRB), the nation’s central bank, has introduced sweeping reforms to its regulatory framework, signaling a major strategic shift aimed at revitalizing Nepal’s capital market.
Share Loan Limit Removed Lockin
Through its latest circular, the NRB has aggressively targeted and eliminated several long-standing restrictions that governed credit flow to the securities market and limited the investment flexibility of banks and financial institutions (BFIs). These changes are not merely regulatory adjustments; they represent a bold move to harmonize monetary policy with the growth aspirations of the capital market, ensuring that the financial sector can act as a more dynamic and less restricted participant in the nation’s economic engine. By liberalizing share-backed lending and shortening investment holding periods, the central bank aims to substantially boost liquidity, enhance market confidence, and foster a more competitive and responsive investment landscape. The sheer magnitude of these changes is expected to trigger a significant positive impact across the banking, finance, and investment sectors.
Key Reform 1: Elimination of the Share-Backed Loan Ceiling
The most pivotal and widely welcomed change is the complete removal of the NPR 25 crore (NPR 250 million) maximum limit on share-backed loans for individual borrowers.
Previously, this stringent cap had been a major point of contention within the investor community, as it restricted the ability of large-scale and creditworthy investors to leverage their shareholdings for further capital market participation. The new policy represents a full deregulation of this ceiling, effectively allowing individual borrowers to access potentially unlimited margin loans against the collateral of their listed shares. The actual loan amount will now be determined solely by:
- The individual’s creditworthiness.
- The underlying value of the share collateral.
- The internal risk assessment policies of the lending banks and financial institutions.
This liberalization is projected to unleash a significant influx of credit into the stock market. It resolves a key bottleneck that limited the financial maneuverability of major investors, thereby increasing market liquidity and encouraging a broader, more robust participation from both large retail and institutional players. For banks, this opens a substantial avenue to expand their lending portfolios in the capital market segment, which is a direct mechanism for financial market expansion.
Key Reform 2: Reduced Lock-in Period for Bank Share Investments
In a major boost for the operational flexibility of banks and financial institutions, the NRB has significantly revised the rules governing their investment in and disposal of listed shares.
Shortened Holding Period:
The mandatory lock-in period for banks to hold purchased shares has been cut from one year to just six months. This dramatically shorter holding period allows BFIs to:
- Respond more swiftly to market fluctuations and opportunities.
- Optimize their investment portfolio returns by enabling timely profit booking.
- Improve the overall liquidity management of their investment assets.
Removal of Sale Restriction:
Crucially, the central bank has also completely removed the earlier restriction that limited banks to selling only up to 20 percent of their paid-up capital in shares. This elimination of the 20% ceiling grants banks full autonomy and flexibility over the disposal of their investment portfolio, based entirely on their internal treasury and risk management strategies. Analysts anticipate that this move will create a more dynamic and higher-volume trading environment, as banks will be able to inject and withdraw capital from the market more freely, increasing responsiveness in Nepal’s stock exchange.
Key Reform 3: Mandating Transparency for Unlisted Securities
The new circular introduces refined rules that affect the broader spectrum of bank investments, particularly those in unlisted securities. These provisions are clearly aimed at enhancing transparency, promoting good governance, and ensuring that investment risks are appropriately managed and accounted for:
Unlisted Securities Listing Mandate: If banks and financial institutions invest in unlisted shares or debentures of a company, the company is now required to ensure the listing of those securities within a maximum period of three years from the date of the BFI’s investment.
Adjustment for Non-Compliance: If the investee company fails to achieve listing within the stipulated three-year timeframe, the investing bank is mandated to adjust the entire investment amount through its retained earnings account and record the value in a newly established Investment Adjustment Fund.
This forward-looking measure places a clear responsibility on banks to conduct thorough due diligence and on investee companies to comply with listing requirements, thereby de-risking the BFIs’ balance sheets from prolonged exposure to opaque, unlisted assets and encouraging capital market formalization.
Strategic Rationale and Market Impact
These comprehensive policy changes are deeply rooted in the NRB’s strategic objective to address historical challenges that have constrained the growth of Nepal’s stock market. The deliberate liberalization is expected to yield several profound benefits:
Stimulation of Market Activity: By removing the cap on share-backed loans and reducing the lock-in period for banks, the policy will inject significant liquidity and stimulate higher trading volumes, which are key indicators of a healthy and active market.
Increased Investor Confidence: The removal of restrictions signals the central bank’s confidence in the stability of the securities market and its intent to support its growth, which is a critical factor for attracting both domestic and foreign capital.
Financial Sector Flexibility: Banks gain unprecedented flexibility to manage their investment and lending portfolios, enabling them to better utilize capital and allocate resources based on market performance and internal risk parameters.
In conclusion, the Nepal Rastra Bank’s new directives mark a watershed moment for the nation’s capital market. The abolition of the NPR 25 crore loan cap and the shortening of the bank investment lock-in period are decisive steps towards a more liberal, liquid, and dynamic investment environment. While this policy offers immense growth opportunities, its success will ultimately hinge on the robustness of the risk management frameworks adopted by banks and financial institutions to ensure market stability and sustained financial health.
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