Nepal Rastra Bank (NRB) has reduced the provisioning rate of good loans for banks and financial institutions (BFIs) from 1.10 percent to one percent.
Announcing a review of the monetary policy on Tuesday, NRB stated that the reduction aims to ease the burden on BFIs, which have been struggling to maintain high provisioning levels due to the rising number of bad loans. Bankers believe this adjustment will provide some relief in the current financial climate.
NRB classifies bank-issued loans into four categories based on their overdue period: good, sub-standard, doubtful, and bad loans. Loans that remain overdue for up to three months after maturity are considered good loans.
In addition to this change, BFIs have been urging NRB to further lower the provisioning rate for good loans to 0.75 percent and to revise the threshold for non-performing loans under the sub-standard, doubtful, and bad loan categories.
Meanwhile, NRB has raised the primary capital ceiling on non-derivable forwards from 15 percent to 20 percent. The loan-to-value ratio for all types of individual and electric vehicles has been maintained at 60 percent.
The revised monetary policy also sets a target to align the interest rates of microfinance loans with their base interest rates.
NRB has kept the policy rate unchanged at five percent. The minimum interest rate for deposit collection remains at three percent per annum, while the upper limit of the interest rate corridor continues at 6.5 percent per annum. No changes have been made to the required cash reserve ratio or the statutory liquidity ratio.
NRB clarified that the policy rate and bank rate remain unchanged due to improved liquidity in the banking system. With a decline in base interest rates and deposit and loan interest rates, the weighted interbank rate stood at three percent as of mid-February, down from 3.04 percent in the same period last year.
