NRB Publishes Unified Directive: Tightens Provisions for Banks and Financial Institutions

Nepal Rastra Bank has issued a unified directive for banks and financial institutions.

Among the important issues, NRB has tightened the dividend distribution criteria for banks and financial institutions (BFIs).

Until now, BFIs (and other companies for that matter) had been distributing dividends based on the existing paid-up capital during book closure. However, NRB has made a new provision that bars BFIs from distributing dividends as a certain ratio (percentage) of the paid-up capital if the BFIs fail to maintain minimum capital adequacy requirements at any time during a fiscal year.

As of now, the paid-up capital at the end of a fiscal year (during the time of audit by an external auditor) was used for dividend distribution purposes. Thus, the previous procedure disregarded the paid-up capital at any instance of the fiscal year. It was only the existing paid-up capital at the end of the fiscal year that mattered.

To ensure this paid-up capital is maintained throughout the fiscal year, every bank or financial institution should submit its paid-up capital profile of each month within 15 days of another month.

Furthermore, NRB has reduced the interest rate for call deposits.

As of now, the minimum interest rate for savings was set as the interest rate for call deposits. However, the new unified directive has now set the call deposit interest rate as 50% of the minimum rate on savings.

Additionally, the unified directive has also made an addition to the provisions relating to company promoters. According to the amended directive, promoters who own the promoter shares of a government-licensed company will now need approval from NRB to collateralize or sell their shares.

However, this is only for selling or collateralizing more than 2% of the company's promoter shares. Any percentage lower than that do not need this requirement.

In order to get NRB's approval to collateralize or sell the promoter shares, the company should approve of the promoter's shareholding status and ensure a loan hasn't already been taken against the shares.

Unfortunately for BFIs, they can now only update interest rates for deposits on a monthly basis. As of now, banks were free to update their interest rates profile frequently depending on the excess or crisis of liquidity in the economy. If any bank or financial institution wishes to update its interest rates for a month, the notice should be made public before the Nepali month.

Also, NRB has now made it compulsory for BFIs to publish the base rates, interest rates on deposit, and loan schemes of the last three years on their respective website.

In contrast, for loan schemes with a clearance period of more than one year, the rates can only be updated on a semi-annual basis. For borrowers of home, housing, and/or auto loans, the fluctuating interest rates were both an annoyance to keep track of and a burden (if the base rate increased). Thus, the interest rates of such loans should only be updated once in six months if needed.

However, note that if a borrower wants to set the interest rate in accordance with the contemporary rates, the BFIs are obliged to do so. In short, borrowers can either choose adjustable-rate mortgage according to any new update or choose the six-months fixed interest rate that can only be adjusted semi-annually.