The hangover of 12 Crore Cap has been lifted up
In a significant development, Nepal Rastra Bank (NRB) has announced a notable increase in the limits for share-based loans, specifically Loan Against Shares. The previous cap of 12 crores has been uplifted, presenting new opportunities for investors and borrowers alike.
According to the latest circular issued by the central bank, individual borrowers can now access loans against shares up to a maximum of 15 crore rupees. Institutional investors, on the other hand, have the opportunity to avail themselves of loans of up to 20 crore rupees. This adjustment marks a minor shift from previous borrowing restrictions.
The Genesis of the Change
This change in share-based loan limits comes after a prolonged demand from investors for an increase in the previous cap of 12 crore rupees. To understand the context, we need to look back to fiscal year 2078/79 when NRB imposed a borrowing cap on shares through its Monetary Policy. Under this policy, investors, whether individual or institutional, were limited to borrowing up to 4 crores from a single bank and 12 crores in total. Many investors believed that this policy initiated the bear cycle of NEPSE, as it coincided with a decline in the stock market from all-time highs. From the outset, investors voiced their opposition to this restrictive policy.
The following fiscal year, 2079/80, NRB reiterated the policy, emphasizing the 12 crore borrowing limit for individuals using share-based loans and removing the provision that allowed borrowing of only 4 crores from a single bank.
Mixed Reactions to the Adjustment
The revision of the share-based loan limit has generated mixed reactions among investors. Some view it as a positive move that will significantly enhance investment opportunities, while others see it as a relatively minor adjustment. However, one thing is certain: with this revised provision by NRB, the flow of share-based loans is expected to rise, potentially influencing investment dynamics.
Key Financial Reforms
In addition to the changes in share-based loan limits, Nepal Rastra Bank has introduced a series of significant amendments through its Unified Directive issued to licensed banks and financial institutions. These changes are poised to have a profound impact on the financial landscape and economic development in the country. Here are some of the highlights:
- Provision for Loan Losses: The provision for loan losses on good loans has been reduced to 1.25%, providing relief to banks in the amount of NPR 2.3 billion in loan loss provisions.
- Personal Loan-to-Value Ratio: Borrowers can now access personal loans up to NPR 5 million with a 50% loan-to-value ratio, potentially boosting real estate transactions.
- Interest Rate Variance: A maximum 2% interest rate variance for similar loans aims to lower average interest rates and provide relief to borrowers.
- Credit Ratings: Large loans to D category institutions no longer require credit ratings, reducing compliance costs.
- Margin Loan Limits: Increased limits for individuals (NPR 150 million) and institutions (NPR 200 million) stimulate stock market growth.
- Real Estate Loan-to-Value: A higher loan-to-value ratio (50%) for real estate loans in the Kathmandu Valley is expected to boost real estate transactions.
- Savings Protection: Savings up to NPR 0.5 million are now protected by the loan and deposit protection fund, enhancing fund profitability.
- Dormancy Rules: Current account dormancy activates after 1 year of inactivity, streamlining business operations.
- Deposit Collection: National-level development banks gain flexibility as deposit collection limits are removed.
- Investment Timeline: Extended investment timelines (up to 1 year) simplify compliance for banks.
- Bank Guarantee Verification: Transparency is enhanced as bank guarantees can be verified through bank websites.
- Risk Weight for Loans: Smaller auto loans below NPR 2.5 million become more accessible and cost-effective.
- Countercyclical Buffer: A 0.50% countercyclical buffer remains until 2023/24, impacting the banking sector’s capacity.
- Restructuring and Rescheduling: Education, health sector, and calamity-affected projects can be restructured with a 10% interest charge, offering relief.
These amendments signify a strategic move toward economic growth and flexibility, and they are poised to positively shape the financial landscape. The financial sector in Nepal is evolving rapidly, and these changes are expected to have far-reaching implications. Stay tuned for further insights into Nepal’s ever-evolving financial sector!
