Nepalese Commercial Banks Lobby NRB for Two-Way Interest Rate Premium Flexibility
Citing severe limitations in pricing borrower risk, banking institutions are pushing the central bank to allow both upward and downward premium adjustments based on market dynamics.
Commercial banks in Nepal have initiated rigorous lobbying with the Nepal Rastra Bank (NRB) to amend the current "one-way" interest rate premium system. Under the prevailing regulatory framework, banks add a premium to their base rate—representing fund costs and operating expenses—to account for credit risk, administrative costs, and desired returns. However, current directives restrict banks to only lowering this premium after loan approval, strictly prohibiting any subsequent increases. According to Anil Sharma, Executive Director of the Nepal Bankers' Association, this rigid mechanism restricts banks from properly managing deteriorating credit profiles or adjusting to shifting liquidity conditions, ultimately hurting risk management and preventing good borrowers from receiving relief during surplus periods.