Central bank issues new circular to regulate credit, investment, and risk management practices

KATHMANDU: Nepal Rastra Bank (NRB) has issued a fresh circular introducing several regulatory measures aimed at strengthening credit discipline, investment practices, and overall risk management across the banking and financial sector. The directives, which take effect gradually within the current fiscal year, are expected to impact lending, margin loans, loan-to-value ratios, and corporate financing norms.

According to the circular, NRB has emphasized stricter compliance on credit flows backed by collateral, ensuring that banks and financial institutions assess sectoral exposures with greater prudence. The central bank has directed that certain types of collateral-based loans be subjected to rigorous approval processes and transparent reporting, particularly when linked to stock market or corporate debt instruments.

One of the notable provisions is the revision in margin lending rules, where financial institutions will be required to reassess risk parameters and adhere to stricter reporting timelines. The circular further outlines that interest obligations linked to margin loans that fall due by Ashwin-end 2082 BS can be cleared by Poush-end 2082 BS without additional penalty, offering temporary relief to borrowers.

NRB has also tightened regulations on forward and backward linkage investments, instructing financial institutions to gradually reduce exposures that may lead to systemic vulnerabilities. Similarly, the circular calls for loan-to-value (LTV) adjustments, capping collateralized lending against movable and immovable assets at 60 percent, while select special categories may extend up to 80 percent under specific conditions.

Another key provision addresses corporate debt-equity ratios, requiring businesses to maintain a debt-to-equity ratio of no more than 70:30 in order to qualify for certain categories of bank financing. This move aims to promote greater corporate discipline and reduce over-leveraging.

In addition, the circular highlights the introduction of schemes like Payroll Protection Loans, under which financial institutions may extend subsidized credit to support enterprises in maintaining staff salaries and employment continuity. Such loans can carry an interest rate of up to 5 percent with NRB refinancing support, and they must be settled within defined maturity periods.

The directives also touch upon sectoral credit flows, particularly in agriculture, SMEs, and priority sectors, ensuring that banks continue to channel financing into productive areas while avoiding overexposure in speculative segments.

NRB has clarified that these measures are part of a broader policy framework designed to align Nepal’s banking sector with international best practices, reduce systemic risks, and support sustainable growth in the real economy. The central bank has set specific compliance deadlines, with some measures to be fully implemented by mid-July 2026 (Ashadh-end 2083 BS).

By introducing these regulatory controls, the central bank aims to balance stability with growth, ensuring that Nepal’s financial system remains resilient in the face of evolving economic pressures and increasing credit demands.