NRB implements changes to interest rate policy and regulatory retail portfolio

KATHMANDU: In a move to further regulate the financial sector and enhance capital adequacy, Nepal Rastra Bank (NRB) has issued revised directives to banks and financial institutions (BFIs), urging them to maintain a minimum one percent difference between interest rates on institutional and individual deposits, effective from March 14.

This modification, introduced through the mid-term review of the monetary policy for 2023/24, replaces the previous provision where a two percent gap was required between interest rates on fixed deposits for institutions and individuals.

Analysts anticipate that this change may lead to a further reduction in interest rates on deposits, as BFIs navigate the adjustment to comply with the new NRB directive.

At a time when banks are grappling with excess liquidity, they have been driven to lower their interest rates to single digits, emphasizing the need to cut costs.

The NRB’s adjustment aims to ensure a fair balance in interest rates and prevent large disparities between institutional and individual depositors.

Simultaneously, NRB is set to enforce the ‘Regulatory Retail Portfolio’ for agricultural, small, cottage, and medium-scale enterprises from mid-March.

Under this provision, loans provided to firms falling under these categories, up to Rs 20 million, will be included in the ‘Regulatory Retail Portfolio’. This marks a substantial increase from the previous threshold of Rs 10 million.

The rationale behind this adjustment is to assist BFIs in managing their mandatory capital adequacy fund, a requirement imposed by the central bank. Currently, BFIs are obliged to maintain a minimum of 11.5 percent of their risk-weighted assets in the capital adequacy fund.

However, the recent surge in liquidity has impacted their lending capacity, as they struggle to meet the prescribed capital adequacy ratio.

Under the new provision, credit considered under the regulatory retail portfolio will carry only 75 percent of the risk weightage, potentially alleviating pressure on the capital adequacy fund.

This move is seen as a proactive measure by NRB to address the challenges faced by BFIs and promote a more conducive environment for lending, especially to small and medium-sized enterprises.

Bankers, however, have been urging the central bank to raise the threshold of the regulatory retail portfolio even further, suggesting an increase to Rs 30 million.

This proposal aligns with their aim to enhance lending capacity, particularly for businesses falling within the specified categories.

The changes in interest rate differentials and the regulatory retail portfolio threshold are part of NRB’s ongoing efforts to fine-tune monetary policies and maintain a balance between stimulating economic growth and ensuring the stability of the financial sector.

As BFIs navigate these adjustments, the impact on lending practices and the overall economic landscape will be closely monitored.