The Nepal Rastra Bank (NRB) has unveiled a cautiously flexible Monetary Policy for Fiscal Year 2026/27. The central bank has said that the monetary policy, unveiled on Tuesday, would ensure sufficient liquidity and prudent foreign exchange management to achieve seven percent economic growth, contain inflation at 5.5 percent and cover merchandise and services imports for at least seven months.
“Since the current foreign exchange reserve position is comfortable and the overall macroeconomic environment favourable, the cautiously flexible policy stance adopted so far has been continued,” Governor Biswo Nath Poudel said, while unveiling the policy.
The central bank has kept key monetary instruments under the interest rate corridor, including the policy rate, standing deposit facility rate, and bank rate, unchanged. Similarly, it has said that the existing provisions related to the cash reserve ratio (CRR), statutory liquidity ratio (SLR), and standing liquidity facilities will continue in the coming fiscal years as well.
By keeping key policy rates and statutory ratios unchanged, the central bank has signaled that the current macroeconomic framework is stable enough to support recovery. The central bank has kept credit expansion targets at 11 percent for the upcoming fiscal year. While this may look ambitious, given slow credit growth in the current fiscal year, private sector credit must grow if the government is to achieve a seven percent growth rate set in the budget for 2026/27.
Banks will need to expand credit by over Rs 652bn to achieve 11 percent credit growth target. Since banks and financial institutions do not have the capacity to invest such a huge amount of money, the central bank has said banks that do not have the required capital adequacy ratio would be allowed to raise capital by issuing shares.
The monetary policy also proposes managing distressed industries and stressed loans as a way to support credit expansion. The initiative is expected to help revive financially distressed but potentially viable businesses while making it easier for banks to manage their stock of bad loans.
Likewise, the central bank has said that it would end the existing practice of applying a uniform lending standard to all listed companies for margin loans. Instead, the value of shares pledged as collateral will be assessed based on factors such as a company’s financial health, corporate governance, business performance and overall strength to determine loan-to-value (LTV) ratio.
The central bank also plans to address the problem of borrowers being blacklisted due to dishonored checks. According to the NRB, necessary arrangements will be made to reduce obstacles to banking services for individuals who have been blacklisted because of cheque dishonor.
The central bank is also preparing to reform the existing provisions on personal guarantees. At present, if a company borrows Rs 500m, banks often require every director or shareholder to provide an individual personal guarantee for the full loan amount. The NRB is reviewing the provision since this practice exposes directors to unlimited personal liability if the business fails.
The monetary policy also proposes allowing individuals to lend directly to one another instead of relying solely on the banking system. The budget for 2026/27 said individual credit score rating would be introduced to promote peer-to-peer lending. Once the central bank puts in place the necessary framework, individuals can access credit outside the formal banking system based on their credit score.
To manage growing excess liquidity in the banking system and rising foreign exchange reserves, the monetary policy has said that commercial banks will be encouraged to invest in foreign central banks or highly secure foreign debt securities. The central bank believes the measure will help manage both excess liquidity in the domestic financial system and the country’s foreign exchange reserves more efficiently.
Allowing migrant workers to retain some of their remittances in dollar-denominated accounts, easing the loan-to-value ratio for large electric vehicles used in public transportation, greater flexibility in bank branch expansion and closure are some of the positive aspects of the monetary policy.
The monetary policy acknowledges the constraints facing the economy, such as weak credit demand, external dependencies, and structural inefficiencies, while attempting to create conditions for gradual recovery. Whether this approach will be sufficient to achieve seven percent growth remains to be seen.
