The regulatory measures imposed by NRB can be grouped based on their primary objectives: Stability and Risk Management, Liquidity and Solvency, Credit Management, and Development and Inclusion. Here’s a breakdown:
1. Stability and Risk Management
These measures ensure the resilience of the banking system and minimize systemic risks.
- Capital Adequacy Ratio (CAR): Maintains a buffer to absorb losses and prevent insolvency.
- Non-Performing Loans (NPL) Limits: Ensures asset quality and prevents risky lending.
- Single Obligor Limit: Diversifies risk by capping exposure to a single borrower or sector.
- Spread Rate Regulation: Controls excessive profiteering and maintains interest rate fairness.
2. Liquidity and Solvency
Focused on maintaining sufficient liquidity in the banking system and solvency during stress conditions.
- Credit-to-Deposit (CD) Ratio: Restricts over-lending and ensures adequate liquidity.
- Cash Reserve Ratio (CRR): Mandates holding reserves with NRB to manage short-term liquidity crises.
- Statutory Liquidity Ratio (SLR): Requires investment in government securities to ensure stability.
- Net Liquidity Ratio: Ensures banks maintain a minimum proportion of liquid assets to meet immediate obligations.
3. Credit Management
Aims to ensure responsible lending practices and balanced credit distribution.
- Loan-to-Value (LTV) Ratios (if applicable): Prevents over-financing and ensures loans are secured.
- Sectoral Exposure Limits: Caps lending to specific high-risk sectors.
- Priority Sector Lending (PSL): Obligates lending to underfinanced but essential sectors like agriculture and MSMEs.
4. Development and Inclusion
Measures to promote financial inclusion and support economic growth.
- Priority Sector Lending (PSL): Promotes credit flow to agriculture, energy, and small enterprises.
- Differential Interest Rates: Encourages affordable lending to vulnerable sectors.
- Micro, Cottage, and Small Industries (MCSI) Targets: Ensures a portion of credit flows to small businesses.
5. Profitability Control
Ensures consumer protection while balancing banks’ profitability.
- Spread Rate Regulation: Caps the spread between deposit and lending rates.
- Base Rate Monitoring: Establishes minimum interest rate standards for transparency.
These groupings help highlight the multi-faceted approach of NRB in regulating banks, ensuring systemic stability while fostering growth and inclusion.
