How Lending Is Priced and Directed: Base Rate, Spread, Priority and Restricted Sectors

Ask a Nepali banker why your rate is what it is and you will get a two-part answer. The price of a loan and the availability of a loan are set by different mechanisms, answering to different policy objectives. Price is regulated from below by a cost-plus formula and from above by a spread cap. Availability is regulated by quota. A borrower who understands only the first will be baffled by the second.

The base rate

Every licensed bank and financial institution computes a base rate under a formula prescribed by Nepal Rastra Bank (NRB) and publishes it monthly. It is built up from the institution’s cost of funds, the carrying cost of the cash reserve ratio and statutory liquidity ratio it must hold against those funds, and an allowance for operating cost. The formula has been revised repeatedly. NRB is reported to have removed a 0.75 percentage point return-on-assets element, which mechanically lowered every published base rate at once. We have not obtained the circular and flag it accordingly.

What matters commercially is that the base rate is an audited, disclosed, comparable figure. Loan pricing is quoted as base rate plus a premium, and the premium is where the negotiation happens. In a liquid market the premium compresses to almost nothing. Standard Chartered Bank Nepal published a base rate of 3.91 percent for Shrawan 2083 (mid-July to mid-August 2026). Rastriya Banijya Bank, the largest state-owned commercial bank, published a three-month average of 4.13 percent effective 17 August 2026. Against a system weighted average base rate of 6.17 percent reported in mid-2025, that is an extraordinary decline in about a year, driven by remittance-fed deposit growth the credit market has not absorbed.

The spread, meaning the gap between the average rate earned on loans and the average paid on deposits, is capped. Nepali business press and bank disclosures put the ceiling for commercial banks at 4 percent, tightened from 4.5 percent set in February 2019. The cap has not been the binding constraint recently. Sector average spread was reported at 3.74 percent, and both banks cited above are running below 3.8 percent. A cap designed to stop banks over-earning in a scarce-credit environment does very little in a glut.

The policy rate corridor

NRB’s policy rate for FY 2082/83 (2025/26) is 4.5 percent, with the bank rate at 6 percent as the corridor ceiling and the deposit collection rate at 2.75 percent as the floor. Because the Nepali rupee is pegged to the Indian rupee, these rates cannot diverge far from Indian conditions for long without pressure on reserves. That constraint is treated in Nepal’s foreign exchange regime. For a borrower, the consequence is that Nepali rates move with liquidity and with India, and only marginally with domestic credit demand.

Directed lending quotas

Directed lending is the more consequential half of the answer. NRB requires licensed institutions to hold minimum proportions of their loan book in named sectors, measured against total outstanding loans six months earlier, with quarterly penalties calculated at maximum interest rates for shortfalls.

The framework was substantially rewritten by an NRB circular dated 3 Chaitra 2082 (17 March 2026), which cut the aggregate obligation for class A commercial banks from 40 percent to 30 percent and reorganised the categories.

Institution class	Agriculture	Other prescribed sectors	Total prescribed	Deadline
A — commercial banks	10% minimum	20% combined	30%	End Poush 2083 (mid-January 2027)
B — development banks	—	20% combined	20%	End Poush 2083
C — finance companies	—	15% combined	15%	End Poush 2083

The “other” basket is tourism, micro, small and medium enterprises, energy, information technology and communications, and export industries using domestic raw materials. Agricultural lending above the 10 percent floor counts toward the 20 percent, which gives an agriculture-heavy lender useful flexibility. Holdings of agriculture and energy bonds also count, which is how several banks close the gap without originating a single new sectoral loan.

Separately, and unchanged by the March 2026 revision, institutions must lend a minimum of 5 percent to the deprived sector. That category is defined by borrower characteristics rather than industry, and in practice it is met largely through wholesale lending to microfinance institutions. Total directed exposure for a commercial bank is therefore around 35 percent of the book.

The quota and bad loans

The reduction from 40 to 30 percent responded to evidence that the quota was manufacturing bad loans. On data to mid-April 2026, agriculture and fisheries accounted for 23.5 percent of all non-performing loans in the banking system, construction including hydropower for 10.5 percent, and wholesale and retail trade for 10 percent. The system NPL ratio stood at 5.6 percent in the third quarter of FY 2025/26 against 4.98 percent a year earlier. Microfinance, the channel through which most deprived-sector obligations are discharged, reported an NPL ratio of 11.32 percent at mid-April 2026 against roughly 7 percent nine months before.

For a borrower this produces a market that is easy and hard in the wrong places. A modest agricultural or MSME proposition attracts banks that need the category, sometimes on terms that reflect the quota rather than the credit. A large, well-secured proposition outside any prescribed sector competes for the shrinking unallocated remainder of the book, and finds pricing keen but appetite oddly conditional.

Working capital and other caps

Several restrictions operate on purpose rather than on borrower quality. Working capital is the most commonly misunderstood. Under the Working Capital Loan Guidelines 2079, borrowers below the size thresholds have facilities set by bank policy, while facilities above them are sized by formula. For smaller exposures that means a cumulative limit of 20 percent of projected annual turnover, extendable to 50 percent where operating-cycle analysis justifies it. For larger ones it means a required split between permanent and fluctuating working capital, the fluctuating component capped at 25 percent of annual sales and extendable to 40 percent with documented justification. Using a working capital facility to repay other borrowings requires the loan to be classified bad with a 100 percent loss provision, which is why banks refuse the request rather than argue about it.

Other quantitative ceilings sit in the monetary policy for FY 2082/83. Margin lending against shares is capped at NPR 250 million per borrower, raised from NPR 150 million. Residential housing loans are capped at NPR 30 million, raised from NPR 20 million, with loan-to-value at 80 percent for first-time buyers and 70 percent otherwise.

What to ask a lender

Borrowers arriving from jurisdictions where price signals allocate credit consistently underestimate how much of a Nepali bank’s answer is determined before your file is opened. The useful first question to a prospective lender concerns which prescribed-sector bucket, if any, the proposed facility falls into, and how that bank is currently tracking against the end-Poush 2083 deadline. Ask that before asking about the premium over base rate. A lender running short on the 20 percent basket will find reasons to say yes to an energy or export proposition it would otherwise decline, and a lender comfortably over will not.

Sources

1. Unified Directives 2082 for A, B and C class licensed institutions

   Nepal Rastra Bank, Banks and Financial Institutions Regulation Department · Issued 16 January 2026 by Circular No. 10 (ka, kha, ga); amended by circulars up to No. 19 of FY 2082/83 dated 15 July 2026 · Tier 1 — Primary legal instrument

   Supports: That interest rate, base rate, spread and directed-lending obligations sit in the consolidated directives rather than in the Bank and Financial Institution Act itself.

   Accessed 26 August 2026

2. Circular archive, Banks and Financial Institutions Regulation Department, FY 2082/83

   Nepal Rastra Bank · Circulars No. 1 to No. 19, latest 15 July 2026 · Tier 1 — Primary legal instrument

   Supports: That the Unified Directives 2082 have been amended nineteen times in a single fiscal year, so any directive figure requires a date.

   Accessed 26 August 2026

3. Flash Alert on amendment in Directed Sector Lending requirement

   PKF T R Upadhya & Co. · Reporting the NRB circular of 3 Chaitra 2082 (17 March 2026) · Tier 6 — Professional or news source

   Supports: Directed-sector percentages by class of institution, the treatment of excess agricultural lending and agriculture and energy bonds, and the end-Poush 2083 deadline.

   Accessed 26 August 2026

4. Priority lending is dragging down Nepali banks into huge bad debt

   The Kathmandu Post · 3 July 2026 · Tier 6 — Professional or news source

   Supports: The 5 percent deprived-sector floor, the composition of non-performing loans by sector, and the system NPL ratio of 5.6 percent.

   Accessed 26 August 2026

5. Monetary Policy for 2025/26 (FY 2082/83) — highlights

   PKF T R Upadhya & Co., summarising Nepal Rastra Bank · Policy announced 11 July 2025 · Tier 6 — Professional or news source

   Supports: Policy rate 4.5 percent, bank rate 6 percent, deposit collection rate 2.75 percent, the margin lending ceiling of NPR 250 million and the residential housing loan ceiling of NPR 30 million.

   Accessed 26 August 2026

6. Historical monthly base rate and average interest spread

   Standard Chartered Bank Nepal Limited · Shrawan 2083 (mid-July to mid-August 2026) · Tier 4 — Audited disclosure / filing

   Supports: A published base rate of 3.91 percent and average spread of 3.71 percent for Shrawan 2083, and the monthly publication requirement itself.

   Accessed 26 August 2026

7. Base rate, spread rate and cost of fund

   Rastriya Banijya Bank Limited · Effective 17 August 2026 · Tier 4 — Audited disclosure / filing

   Supports: A three-month average base rate of 4.13 percent and a Shrawan 2083 spread of 3.41 percent at the largest state-owned commercial bank.

   Accessed 26 August 2026

8. Working Capital Loan Guidelines, 2079

   Nepal Rastra Bank · 2022, as amended; amendment effective 11 Bhadra 2080 (28 August 2023) · Tier 1 — Primary legal instrument

   Supports: Turnover-linked working capital limits, the permanent and fluctuating split, and the consequence of diverting a working capital facility.

   Accessed 26 August 2026

9. Banks hit by falling spread rates and high costs

   Bizness News · June 2025 · Tier 6 — Professional or news source

   Supports: The 4 percent spread ceiling for commercial banks, the sector average spread of 3.74 percent, and the weighted average base rate of 6.17 percent with lending at 8.15 percent and deposits at 4.37 percent.

   Accessed 26 August 2026