Nepal Rastra Bank Implements Changes in Monetary Policy 2080/81; Updates Risk Weightage of Share Mortgage Loans

Risk weightage, in the context of banking and finance, refers to a percentage assigned to assets or loans based on their perceived risk level. This percentage determines the amount of capital a bank or financial institution needs to hold as a safety buffer against potential losses. Higher-risk assets receive higher risk weightages, while lower-risk assets receive lower risk weightages. For instance, if a loan has a risk weightage of 50%, the bank must hold capital equal to 50% of the loan amount to safeguard against potential losses. This calculation is crucial in determining a bank's capital adequacy ratio, a measure of its financial strength.

Nepal Rastra Bank (NRB) has issued a circular for the implementation of the arrangements made in the Monetary Policy 2080/81.

The Nepal Rastra Bank issued a circular on Friday, clarifying the risk weightage of share mortgage loans. As per the new regulation, a 150 percent risk weight will be applied to share mortgage loans above Rs. 50 lakhs. This marks an adjustment from the previous policy, where the 150 percent risk weight applied to share mortgage loans above Rs. 25 lakhs. Now, the 150 percent risk weight will be maintained for share mortgage loans exceeding Rs. 50 lakhs.

Similarly, the risk weight of share mortgage loans up to 50 lakhs will be maintained at 100 percent. This is a change from the previous policy, where the risk weight of share mortgage loans up to 25 lakhs was maintained at 100 percent, but now it has been increased to cover loans up to 50 lakhs.

Point 106 of the monetary policy mentioned that provisions related to the existing risk weightage of share mortgage loans, real estate loans, and hire purchase loans would be reviewed.

Subsequently, on the day when the monetary policy was made public, NRB Governor Maha Prasad Adhikari held a press conference. During the conference, in response to a question seeking clarification on the point, he indicated that rather than adjusting the risk weightage percentage, the financial brackets would be modified.

He stated that NRB would issue a circular in the coming days to further clarify the confusion.

Nepal Rastra Bank Maintains 100% Risk Weighting for Real Estate Loans; Introduces Flexibility in Home Loans to Address Construction Sector Recession

The CounterCyclical Buffer is a regulatory measure implemented by central banks to ensure the stability of the banking system during economic fluctuations. It requires banks to hold additional capital during periods of economic growth and credit expansion, acting as a safety net. This extra capital can be released during economic downturns to absorb losses and support lending, stimulating recovery. The buffer amount is determined by the central bank based on factors like credit growth and financial system stability. It serves to prevent excessive risk-taking by banks during good times and promotes a resilient banking system that can continue providing support to individuals and businesses in challenging economic conditions. 

Starting from the current financial year, commercial banks are required to maintain a counter-cyclical buffer. Additionally, national-level development banks are also subject to the same requirement as commercial banks.

The implementation of the counter-cyclical buffer for commercial banks began in the current financial year. This arrangement, which the central bank has been postponing for the past few years, has finally come into effect.

Banks, which are currently maintaining a total capital of 11 percent, must now increase it to 13.5 percent by adding an additional 2.5 percent as per the counter-cyclical buffer requirement.

Nepal Rastra Bank has announced that the counter-cyclical buffer will also be applicable to national-level development banks. The Central Bank issued instructions on Friday, instructing them to maintain the required capital fund accordingly.

National-level development banks will also need to maintain an additional capital fund, similar to commercial banks.

Only 100% Risk Load in Real Estate Loans Taken by Licensed Companies; No Flexibility in Personal Loans

Nepal Rastra Bank has maintained a 100 percent risk weighting for real estate loans taken through licensed companies.

The central bank has set a 100 percent risk weight for real estate loans taken by companies licensed for land purchase and development, as well as organizations and projects licensed by the Government of Nepal.

Similarly, it has been arranged to maintain a loan-to-value ratio of up to 70 percent in residential house loans up to 2 crore rupees, subject to various conditions, for those who purchase or build a house for the first time.

Previously, the limit for such loans was up to one and a half crore rupees.

Nepal Rastra Bank has taken steps to address the recession in the construction sector by adopting some flexibility in home loans.