NRB to Bring Lending Rates to Single Digits Within a Year; Focus on Fixed-Rate Loans for Productive and Export Sectors

Nepal Rastra Bank (NRB) is set to regulate both deposit and lending interest rates within a defined range over the next year, as part of the government's newly introduced Economic Reform Implementation Plan. According to the plan, the central bank will ensure positive real interest rates on deposits and lending rates confined to high single digits or low double digits.

Core Objectives: Reduce Interest Spread and Operational Costs

The NRB has been tasked with narrowing the spread between deposit and lending rates, lowering operational costs, and enhancing the financial stability of the banking sector. This is to be accomplished within one year.

The bank is also required to strengthen interest rate corridor mechanisms, maintain interbank rates close to policy rates, and gradually reduce the upper and lower bounds of the interest rate corridor. Currently, the corridor ranges from 3% to 6.5%.

The Ministry of Finance will monitor and facilitate NRB’s compliance with the reform agenda.

Exchange Management and Liquidity Stabilization

To ensure smooth liquidity management and mitigate interest rate volatility, NRB is expected to:

• Improve liquidity tools,

• Align monetary objectives with foreign exchange and regulatory frameworks,

• Maintain foreign exchange reserves sufficient to cover 5–7 months of imports. (As of now, reserves can cover 14.2 months.)

Bond Market and Alternative Finance

To tackle fluctuations in interest rates and ensure smoother financial flows, NRB will:

• Develop the government bond market,

• Introduce alternative financing methods, and

• Encourage policies to reduce production and business costs.

Fixed Interest Rates for Key Sectors

NRB has been directed to ensure that:

• Loans flowing into productive and export-oriented sectors are available at fixed interest rates,

• First-time homeowners with stable incomes can access fixed-rate home loans for a specific period.

This is expected to bring predictability and stability to interest rates for these crucial economic contributors.

Anti-Inflation and Currency Exchange Adjustments

The reform plan also outlines:

• Measures to combat inflation and prevent exchange rate overvaluation,

• Studies to explore alternatives to the INR peg,

• Maintaining competitive and adaptable foreign exchange practices.

23 Key Directives Given to NRB Under the Reform Plan:

1. Implement a more efficient interest rate corridor, reduce the band, and control volatility.

2. Align monetary policy with foreign exchange and regulatory practices.

3. Maintain forex reserves to cover 5–7 months of imports.

4. Ensure fixed-rate loans to productive and export-driven sectors.

5. Provide fixed-rate first-time home loans to borrowers with stable income.

6. Reduce banking operational costs and interest spreads.

7. Keep deposit rates positive and lending rates in single digits or low double digits.

8. Develop the government bond market.

9. Conduct studies on alternatives to the Indian Rupee exchange peg.

10. Control inflation to avoid real exchange rate overvaluation.

11. Avoid using debt for recurrent expenditures, issue short-term treasury bills only for deficit financing.

12. Use infrastructure bonds for high-yield projects.

13. Allow NEA to issue energy bonds for hydropower investment.

14. Build capacity for Credit Information Center and initiate personal credit scoring.

15. Provide 3–5 year fixed-rate loans to MSMEs and exporters.

16. Enable margin lending via licensed brokers in capital markets.

17. Establish a foreign investment approval committee led by the NRB Governor.

18. Work with SEBON to introduce Global Depository Receipts (GDRs).

19. Red flag sectors with over-supply and discourage lending to such industries.

20. Ensure at least 60% of total lending goes to productive sectors like IT, renewables, forest-based industries.

21. Keep interest on productive loans at least 1% lower than on consumption loans.

22. Allow warehouse receipt-based financing for farmers.

23. Operate Agriculture Development Bank as a specialized agricultural finance institution.

This comprehensive action plan is based on the recommendations of the High-Level Economic Reform Commission 2081, chaired by former Finance Secretary Rameshore Prasad Khanal. The plan emphasizes sector-specific accountability, timelines, and actionable reforms aimed at stabilizing Nepal’s financial system, enhancing economic productivity, and attracting investment.