Nepal Rastra Bank Cuts Minimum Share Holding Period to 45 Days, Keeps Countercyclical Buffer at Zero

Nepal Rastra Bank (NRB) has introduced significant changes to the investment and capital-related provisions applicable to banks and financial institutions, reducing the minimum holding period for investments in shares and debentures from six months to 45 days. The changes have been incorporated into the Unified Directive, 2082 issued for Class ‘A’, ‘B’ and ‘C’ licensed banks and financial institutions. The NRB’s Banks and Financial Institutions Regulation Department issued the circular under the authority granted by Section 79 of the Nepal Rastra Bank Act, 2058. Under the revised provision, banks and financial institutions investing in the shares and debentures of organized institutions that have issued shares to the general public and are listed on the securities exchange will now be required to hold such investments for a minimum of 45 days. Previously, banks and financial institutions were required to hold such investments for at least six months. The revised provision provides greater flexibility for banks to manage their securities portfolios and respond to market conditions. However, the NRB has retained the restriction against making short-term investments in shares and debentures of organized institutions through any arrangement intended to circumvent the prescribed holding period. The change is expected to provide institutional investors with greater flexibility in portfolio management while maintaining safeguards against excessive speculative trading. The NRB has also maintained the countercyclical capital buffer at zero percent for commercial banks for the fiscal year 2083/84. With the buffer maintained at zero, commercial banks will not face an additional capital requirement under this provision. The arrangement allows banks to utilize their existing capital resources for lending and investment in productive sectors, particularly at a time when credit demand remains relatively subdued. Alongside the shorter holding period, the central bank has strengthened the risk-management framework governing banks’ investments in securities. Banks and financial institutions investing in government securities, NRB bonds, shares, debentures and other financial instruments must formulate a clear investment policy and procedure aimed at minimizing speculative risk. The policy must be approved by the institution’s board of directors before implementation. The policy is required to clearly outline the objectives and strategies of investment, scope of investment, prohibited investments, holding periods, and procedures for managing conflicts of interest. It must also specify the basis for classifying investments between the banking book and trading book, along with appropriate risk-management measures, including stop-loss provisions. The revised directive has also introduced stronger monitoring requirements for investment portfolios. Banks are required to implement systems for daily mark-to-market valuation, stress testing, and internal risk rating to assess and manage risks arising from investment activities. The measures are intended to ensure that banks continuously monitor changes in the market value and risk profile of their investment portfolios rather than relying solely on periodic assessments. To improve transparency in investment reporting, the NRB has introduced separate monthly reporting formats for investments classified under the banking book and trading book. Banks and financial institutions must submit their approved investment policies, procedures and investment-related details to the NRB’s Supervision Department in the prescribed formats. The revised framework therefore combines a shorter minimum holding period with tighter governance, disclosure and risk-management requirements. The reduction of the minimum holding period from six months to 45 days gives banks greater flexibility to manage their securities investments according to market conditions. It may also allow financial institutions to realize gains relatively sooner and diversify income sources through securities investments when demand for loans is weak. At the same time, the NRB has retained safeguards intended to prevent excessive speculation and ensure that securities investments remain within an institutionally approved risk-management framework. With the countercyclical buffer remaining at zero percent and the minimum holding period reduced to 45 days, the latest amendments provide banks with greater flexibility in capital deployment and securities portfolio management while placing continued emphasis on board-level oversight and risk controls.