In its second mid-term review of the monetary policy for the current fiscal year, Nepal Rastra Bank (NRB) has decided to maintain most of the existing policy measures. Despite recent inflationary pressures, the central bank has opted to keep its policy tools unchanged to support economic growth.
- Policy Rate: Remains at 5%
- Deposit Collection Rate: Stays at 3% (lower limit of the interest rate corridor)
- Bank Rate: Retained at 6.5% (upper limit of the interest rate corridor)
Adjustments in Loan Provisions
NRB has reduced the provisioning rate for good loans from 1.1% to 1%. Loans classified as “good” include those with no overdue payments or those overdue by up to one month. This reduction is expected to decrease banks’ provisioning expenses, potentially increasing their operating profits by approximately NPR 5 billion, according to Manoj Gyawali, Senior Deputy CEO of Nabil Bank.
Changes in Loan-to-Value (LTV) Ratios
- Electric Vehicles (EVs): The LTV ratio has been reduced from 80% to 60%, meaning buyers can now borrow only up to 60% of the vehicle’s total value.
- Petroleum Vehicles: The LTV ratio has been increased from 50% to 60%, aligning it with the new EV policy.
This adjustment has drawn criticism from the Nada Automobiles Association of Nepal, with Vice President Rajan Babu Shrestha stating that reducing the LTV ratio for EVs contradicts the government’s goal of promoting electric vehicles. He warned that this move could discourage EV adoption. However, he acknowledged the positive impact of increasing the LTV ratio for petroleum vehicles.
Other Policy Measures
- Microfinance Interest Rates: From Jestha (mid-May), microfinance institutions must set their interest rates based on the base rate, a practice previously applicable only to banks and financial institutions.
- Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR): Both remain unchanged.
- Non-Deliverable Forward (NDF) Investments: The investment limit for primary capital has been increased from 15% to 20%.
Share-Secured Loans
The existing provisions for share-secured loans remain unchanged. Loans exceeding NPR 5 million carry a 125% risk weight, while smaller loans have a 100% risk weight. As of Poush (mid-January), the total flow of share-secured loans reached NPR 1.13 trillion, up from NPR 90.09 billion in Ashad (mid-July). An NRB official stated that no additional flexibility has been introduced for share-secured loans.
Conclusion
The NRB’s mid-term review reflects a cautious approach, balancing the need to control inflation while supporting economic recovery. The adjustments in provisioning rates and LTV ratios aim to stabilize the financial sector, though concerns remain about their impact on specific industries like electric vehicles.