Monetary Policy H1 review: Flexibility in working capital loans, Softer blacklist rules introduced

KATHMANDU: The mid-year review of the monetary policy for FY 2025/26 (2082/83 BS) released by the central bank, Nepal Rastra Bank, has kept key policy instruments unchanged while introducing targeted flexibility to stimulate credit growth, ease business financing conditions, and support priority sectors of the economy.

The review maintains the existing interest rate corridor, bank rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR), signaling a continued cautious stance on macroeconomic stability. However, the central bank has simultaneously introduced policy adjustments aimed at encouraging lending expansion, improving working capital financing conditions, and making the credit blacklist framework more practical.

Broader Scope for Priority Sector Lending

One of the most notable changes is the expansion of sectoral lending coverage. Previously focused mainly on agriculture and energy, the policy now includes tourism, information technology, and export-oriented industries based on domestic raw materials as priority sectors.

The central bank has indicated that minimum lending thresholds for banks in these sectors will be revised accordingly. This move is expected to channel institutional credit into productive industries, strengthen export potential, and support Nepal’s structural shift toward higher-value economic activities.

Financial analysts interpret the expansion as an attempt to align monetary policy with the government’s broader growth strategy, particularly in tourism revival, digital transformation, and industrial diversification.

Working Capital Loan Rules Relaxed

The review introduces significant flexibility in the working capital loan framework, providing relief to businesses struggling with liquidity constraints.

Banks will now be allowed to determine the tenure of permanent working capital based on a borrower’s cash flow patterns and financial statements. Previously, borrowers had to maintain outstanding balances below 10 percent for at least seven consecutive days each year to qualify under the rules. This threshold has now been raised to 30 percent, a change expected to make loan management more practical for firms operating with fluctuating cash cycles.

Economists say the revision could improve liquidity flow in the market and reduce operational pressure on businesses, especially traders, manufacturers, and seasonal industries.

Relief for Businesses Displaced by Highway Expansion

In a targeted support measure, the central bank has allowed loan restructuring and rescheduling facilities until mid-July 2026 (end of Ashar 2083 BS) for enterprises displaced due to highway expansion projects.

This provision is expected to benefit small and medium enterprises affected by infrastructure development, preventing them from slipping into default while allowing time to restore operations.

Higher Limit for Forex Risk Hedging

To improve foreign exchange risk management, the limit for non-deliverable forward (NDF) transactions has been increased from 25 percent to 30 percent.

The measure is designed to help importers, exporters, and firms with foreign currency exposure better hedge against exchange rate volatility. Bankers note that the change may also encourage more formal hedging practices in Nepal’s still-developing forex derivatives market.

Push Toward Digital Payments

The central bank has also signaled a stronger push toward a digital economy. The review discourages cheque-based transactions and prioritizes electronic payment systems as part of a broader strategy to modernize the financial system.

The policy also mentions facilitation of foreign investment in the IT sector and encouragement of co-financing loans, both aimed at supporting digital infrastructure and technology-driven enterprises.

This shift reflects the regulator’s intention to accelerate financial digitization, improve transaction transparency, and reduce operational costs in the banking system.

Practical Approach to Credit Blacklisting

The review introduces a more pragmatic stance on loan defaulters and credit blacklisting. Borrowers unable to repay due to genuine circumstances will not be immediately blacklisted. Additionally, those already on the blacklist may be allowed up to six months to settle dues if they present valid reasons and commit to repayment.

Officials say this approach is intended to balance financial discipline with economic realities, particularly as many businesses continue to recover from prolonged credit tightening and weak demand.

Policy Signal: Stability with Targeted Support

Overall, the mid-year review suggests that the central bank is maintaining monetary stability while selectively loosening rules to support credit flow, productive sectors, and digital transformation.

Market observers believe the strategy reflects a calibrated approach — avoiding broad monetary easing while using regulatory flexibility to stimulate growth where needed most.