Nepal Rastra Bank Revises Banking Rules, Eases Provisioning and Tightens Governance

Kathmandu — Nepal Rastra Bank (NRB) has introduced a wide-ranging set of regulatory reforms affecting banks and financial institutions, revising rules on non-banking assets, bad loan classification, blacklisting, housing loans, branch management, and overseas travel by senior executives. The changes were announced through a circular issued on Monday and are aimed at reducing operational rigidities while strengthening governance discipline in the banking sector.

Stricter Conditions for Acquiring Non-Banking Assets

Under the revised directive, banks and financial institutions will now be allowed to acquire non-banking assets (NBA) only after completing the collateral auction process at least three times. Previously, banks were required to acquire collateral themselves if it failed to sell during auction while attempting loan recovery.

NRB has now clarified that banks may take ownership of collateral only if it remains unsold even after three auction attempts. Furthermore, such assets must be valued at either the prevailing market price or the total outstanding dues as of the previous day—whichever is lower. This move is expected to curb premature acquisition of assets and promote genuine recovery efforts.

Relief on Provisioning Burden for Banks

In a significant relief to banks, NRB has removed the requirement to maintain 100 percent provisioning against non-banking assets once they are booked. The central bank has also abolished the rule requiring additional accounting adjustments when such assets are later sold.

These changes are expected to reduce the financial strain on banks’ balance sheets and discourage the practice of booking non-banking assets merely for accounting convenience. Bankers believe the revised rules will lead to more cautious and transparent asset management.

Changes in Bad Loan Classification

NRB has also revised rules related to non-performing loan (NPL) classification. Under the new provision, if a borrower regularizes the loan after the auction process has begun, banks will no longer be required to keep the loan classified as bad.

Previously, loans were mandatorily classified as bad once auction or legal recovery proceedings began, regardless of subsequent repayment. The revision is expected to encourage borrowers to settle dues even at later stages and reduce unnecessary stress on banks’ asset quality indicators.

Relaxation in Mandatory Consortium Lending

The central bank has also amended rules related to mandatory consortium lending for loans of Rs. 2 billion or more. Short-term working capital loans that are non-renewable in nature, even if they exceed Rs. 2 billion, will no longer require consortium financing if governed by a pari-passu agreement.

This change provides flexibility for banks in managing large short-term exposures and reflects NRB’s attempt to align regulation with practical lending realities.

Revised Blacklisting and Delisting Provisions

NRB has made notable changes to its blacklisting framework. Borrowers will now be removed from the blacklist if banks fully recover dues through the acquisition of non-banking assets, provided the borrower formally relinquishes all ownership claims on the collateral.

Additionally, NRB has introduced a safeguard mechanism for cases where individuals or entities are wrongly blacklisted. If such an error is confirmed and approved by the concerned institution’s chief executive, the blacklisting must be removed without leaving any record. However, banks must report such cases quarterly to their boards, ensuring internal accountability.

NRB has clarified that individuals or entities blacklisted under its directives will be barred from opening bank accounts, including call accounts. However, exceptions have been maintained for social security allowances, salary accounts, and pension payments, ensuring basic financial access.

Housing Loans: Loan-to-Value Ratio Maintained at 70 Percent

In the housing finance segment, NRB has reaffirmed that banks may provide up to 70 percent loan-to-value (LTV) financing for private residential house construction. While the LTV cap existed earlier, the latest circular explicitly states that this applies regardless of loan amount, removing previous ambiguity.

The provision also applies to government-approved housing developers, indicating continued policy support for the real estate and housing sector.

Tighter Rules on Foreign Travel for Bank Leadership

NRB has tightened governance rules by making board approval mandatory for foreign travel by bank chairpersons, directors, and chief executive officers. Previously, institutions were allowed to formulate internal procedures for such travel approvals.

The central bank now requires a formal board decision for every foreign visit, a move seen as strengthening oversight and accountability at the senior management level.

Banks Allowed to Merge Branches in Metropolitan Areas

In line with the mid-term monetary policy review, NRB has allowed banks to merge branches located within metropolitan cities at their own discretion. However, branches established to serve government offices or public institutions may be merged only with written consent from the concerned entity.

Banks must provide 90 days’ prior public notice through national newspapers, their websites, and branch notice boards before implementing branch mergers. Customers affected by branch consolidation will be allowed to close loans or discontinue services without any charges.

Banks are also required to inform NRB within three working days after completing branch adjustments.

A Shift Toward Balanced Regulation

The latest regulatory overhaul reflects NRB’s attempt to strike a balance between financial stability, operational flexibility, and governance discipline. While banks gain relief on provisioning and asset management, tighter rules on accountability and transparency suggest that the central bank remains cautious amid lingering credit risk concerns.

As the banking sector navigates slowing credit growth and asset quality pressures, the effectiveness of these reforms will depend largely on how banks implement them in practice—and how closely the regulator monitors their impact.