Nepal Rastra Bank (NRB) has unveiled an accommodative monetary policy for FY 2025/26 that appears friendly to the private sector. Guided by liberal economic principles – deregulation and private sector development – the policy adopts a flexible stance toward banks in terms of operations and toward borrowers. Agriculture and small and medium enterprises (SMEs) remain at the centre of this year’s policy thrust, aimed at strengthening the country’s productive base.
While the policy brings both opportunities and concerns, it does offer some relief to the banking sector. Banks, which are under pressure to meet regulatory capital requirements despite ample liquidity, will benefit from new provisions. Previously, banks were required to make cent percent provisioning for non-banking assets amounting to around Rs. 40-45 billion. The new policy now allows such assets to be counted as supplementary capital, addressing solvency concerns and increasing lending capacity.
Additionally, banks have been permitted to issue preferential shares to boost their capital base. Following NRB’s proposal, the Securities Board of Nepal (SEBON) amended its guidelines to facilitate this. The preferential shares, now positioned as investment instruments for the general public, reduce the exclusive burden on promoters and major shareholders.
In this sense, the monetary policy can be seen as a preparatory effort to restore credit flow. Should credit expansion still fall short, NRB may consider further interventions based on its internal assessments.
What is new in the monetary policy 2025/26?
Certain sectors such as real estate and the stock market have received focused facilitation. Recognising real estate’s potential to stimulate economic activity, the policy allows credit restructuring for real estate firms – a notable regulatory forbearance. Moreover, the cap on home loans has been raised from Rs. 20 million to Rs. 30 million, with the loan-to-value (LTV) ratio relaxed to 80% to encourage demand.
Similarly, the increase in margin lending limits – from Rs. 150 million to Rs. 250 million – is expected to fuel a rally in the stock market.
To address longstanding grievances about sluggish agricultural credit, banks are now allowed to lend up to Rs. 1 million against crop and agri-business collateral, particularly in areas along the Postal and Mid-Hill highways. While not mandatory, this provision is a welcome step for farmers previously denied access to credit.
Furthermore, loans of up to Rs. 30 million now qualify as SME credit, eligible for subsidised interest rates – only a 2% premium over the base rate. Banks and financial institutions (BFIs) are required to allocate at least 15% of their portfolios to the SME sector by 2028, which could be instrumental in scaling up micro and small enterprises – if effectively implemented.
Focus on Spent Forces
Despite these changes, the monetary policy largely continues the status quo with focus on spent forces such as real estate, working capital adjustments, and stock market facilitation – strategies tried and tested over the years with limited long-term results. These approaches are like expired medicines: they may not cure the economy and might even trigger side effects.
Instead of pushing for transformative changes, NRB appears content with appeasing the usual power centres. For example, the policy attempts to emulate the so-called ‘American Dream’ by supporting first-home buyers through high LTV ratios. However, this aspiration overlooks ground realities – Nepal sees an annual exodus of nearly 700,000 youth seeking foreign employment, and census data indicates a surge in concrete housing stock. These facts suggest that demand for new housing loans may not materialise as anticipated.
In the capital market, structural issues remain. While the secondary market sees intense speculation, there’s little emphasis on developing a robust primary market. Without promoting instruments like IPOs, FPOs, and book-building mechanisms to channel capital into productive investment, speculation alone cannot drive economic transformation. NRB’s alignment with vested interest groups in this regard is concerning.
Agriculture, despite policy lip service, continues to operate at a subsistence level. The sector suffers from a lack of mechanisation, capital investment, and labour – compounded by mass youth migration. Without private sector participation armed with technology and capital, agriculture will remain trapped in low productivity and stagnation.
Lack of Structural Shift
Nepal’s existing economic structure is ill-equipped to deliver meaningful change. The current policy misses emerging priorities such as climate change, green financing, biodiversity conservation, information technology, and modern health and education systems. Effective monetary policy must be accompanied by strong institutional arrangements and tailored programmes.
Although NRB has launched several initiatives – like lending targets in energy (10%), agriculture (15%), and SMEs (15%) – they are routed through commercial banks. These institutions, despite their nationwide presence, are primarily geared toward basic services like fund transfers, corporate lending, and trade finance and the facilities are confined in the headquarters, corporate offices and other large banks operating in urban centres. Limited capacity of bank branches in the rest of the country to conduct field inspections, assess loan proposals, and monitor performance hampers effective delivery. On the other hand, they are unable to support the potential borrowers to enrich their proposals, book keeping and preparing statements to avail credit.
The solution may lie in enabling new institutions such as provincial and local development banks that can cater to underserved populations with specialised services. Tinkering with old tools and depending on overstretched institutions won’t address structural gaps or ensure inclusive growth.
Moreover, this policy leans heavily in favour of 1.9 million borrowers while ignoring the interests of depositors (almost 50 million deposit accounts). Interest rates have been lowered below the inflation target of 5%, effectively eroding depositors’ real returns and undermining consumer protection.
Elitism Over Pluralism
Elitism, pluralism, professionalism, positivism, post positivism are intriguing public policy making frameworks. Public policy should strike a balance among them. This monetary policy clearly prioritises the interests of banks and selects borrowers, sidelining the wide spectrum of actors in the economy. A more pluralistic approach would include licensing local/provincial banks, creating green financing instruments (e.g., for EV infrastructure, circular economy businesses), and supporting sectors like ICT, medicinal herbs and aromatic plants, 3R (reduce, reuse, recycle) industries, and tourism.
Such a diversified policy mix could foster import substitution, employment generation, self-employment, and grassroots enterprise development.
Without these structural and institutional shifts, the current flexibility risks distorting financial sector stability. It could further aggravate issues like non-performing loans and misuse of working capital rather than steering the economy back on track – contrary to the cautious approaches taken in past monetary policies.
(Thapa is an economist and former Executive Director of Nepal Rastra Bank.)
