NRB eases working capital rules, broadens priority lending in its latest policy review

NRB eases working capital rules, broadens priority lending in its latest review.

The central bank grants banks greater autonomy over working capital loan tenures, expands priority sector lending to IT and tourism, raises overseas investment limits, and signals a push toward digital payments and tech infrastructure financing. The Nepal Rastra Bank (NRB) has introduced significant flexibility in working capital and priority sector lending as part of its mid-year review of the current fiscal year’s monetary policy, unveiled on Tuesday.

The central bank has kept existing arrangements unchanged regarding the interest rate corridor, bank rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR).

Greater flexibility in working capital loans

In a major shift, NRB has allowed banks and financial institutions to determine the tenure of permanent working capital loans at their own discretion. Previously, such loans were capped at tenures ranging from three to ten years depending on the nature of the credit. Under the revised framework, NRB will no longer prescribe the duration.

Instead, banks will set repayment tenures based on an assessment of the borrower’s cash flow and financial statements, providing lenders with greater autonomy in credit risk evaluation.

The NRB has also relaxed repayment requirements for working capital loans. Borrowers were earlier required to reduce their outstanding working capital loan balance to below 10% for at least seven consecutive days once a year. This threshold has now been raised to 30%.

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In practical terms, a borrower with a NRs 100 working capital loan previously had to repay at least NRs 90 at one point during the year, leaving no more than NRs 10 outstanding for seven consecutive days. Under the revised rule, repaying NRs 70 will suffice. The move is expected to ease liquidity pressures on businesses and improve short-term cash flow management.

Priority sector lending expanded

The central bank has broadened the scope of priority sector lending. While banks were previously mandated to extend credit to agriculture, micro and small enterprises, and energy, the revised framework now includes information technology, export-oriented industries, and tourism within the priority ambit.

Although development banks and finance companies were already required to allocate mandatory lending to tourism, commercial banks can now also count their tourism sector exposure toward priority lending requirements.

According to the review, the sectoral lending framework, introduced to promote credit expansion in agriculture, energy, and small and cottage industries, will now incorporate tourism, IT, and export-oriented industries based on domestic raw materials. The existing requirement for banks and financial institutions to maintain minimum credit ratios in each designated sector will also be revised.

The expansion comes as several banks have faced penalties for failing to meet priority lending thresholds. Notably, Standard Chartered Bank Nepal was fined in recent months for non-compliance. With the broader definition, a wider range of lending will qualify under the mandatory targets, potentially reducing regulatory penalties.

Higher overseas investment limits

NRB has also increased the ceiling for banks’ foreign investments. The limit on investments in foreign bonds and non-deliverable forwards, previously capped at 25% of primary capital, has been raised to 30%.

The revision enables banks to deploy surplus foreign currency reserves more profitably. Until now, banks with excess liquidity were effectively compelled to park funds at NRB under the standing deposit facility at an interest rate of 2.75%. With overseas bond yields higher, banks can potentially earn improved returns.

Yields on U.S. Treasury securities are currently above 3.5%, while bonds in other markets are offering returns exceeding 4%, creating opportunities for enhanced income from foreign investments.

The review further notes that the central bank will streamline foreign investment processes for inflows into infrastructure projects in data centers, cloud computing, artificial intelligence, and robotics, while encouraging banks and financial institutions to expand financing to these technology-driven sectors. 

Relief for displaced businesses

The central bank has introduced special provisions for enterprises displaced by the expansion of the Mahendra Highway and the Mid-Hill Highway. Loans extended to such businesses can be restructured or rescheduled until the end of the fiscal month of 2025/26 (mid-July 2026), provided a minimum interest rate of 10% is charged.

Additionally, the central bank has reiterated that borrowers unable to immediately repay loans due to genuine circumstances will not be automatically blacklisted. For borrowers already on the blacklist, banks and financial institutions may remove them from the list for up to six months, subject to valid justification, to facilitate recovery of outstanding dues. The bank will progressively curb the use of cheque-based transactions as it accelerates the shift toward digital payment systems, the review states.