Nepal Rastra Bank has relaxed several provisions in its latest monetary policy for FY 2082/83, which has been well received by investors and stock market participants. However, one key expectation from the market remains unfulfilled — easing the restriction on commercial banks’ involvement in short-term share trading.
One-Year Lock-in Policy Still in Effect
The current policy mandates that banks and financial institutions must hold shares for a minimum of one year after purchase. This limitation prevents them from participating in short-term trading, despite having ample investable funds.
The policy reads:
“Banks and financial institutions are allowed to invest in shares and debentures of organized institutions only for a period exceeding one year.”
This clause remains unchanged in the new monetary policy, disappointing both investors and bankers who were hopeful for reforms.
Excess Liquidity, Limited Investment Options
Nepali commercial banks are currently sitting on over NPR 612 billion in excess liquidity parked at the central bank. Bankers argue that this money could be better utilized in capital markets if regulatory barriers were lifted.
Santosh Koirala, President of the Nepal Bankers’ Association, stated:
“We have consistently recommended removing the one-year lock-in. With sufficient investable funds available, this would help boost economic activity.”
He added that profits made by banks ultimately benefit shareholders and that restricting trading unnecessarily limits financial efficiency.
Missed Opportunity for Market Stabilization
Stock market experts and investors believe institutional involvement is crucial for stability. Subash Chandra Dhungana, an investor, said:
“When institutional investors are active, the market becomes less volatile. They help maintain demand during downturns and supply during upturns.”
Without active participation from banks, the market relies heavily on retail investors, increasing volatility and reducing long-term confidence.
Restrictions on Investment Sectors
Currently, commercial banks are not permitted to invest in the shares of development banks, finance companies, or microfinance institutions. They are only allowed to invest in sectors like:
Analysts say this limits price discovery and often keeps high-performing companies undervalued.
Regulatory Loophole: Can Directives Override Policy?
Bharat Ranabhat, former President of the Stock Broker Association of Nepal, argues that although the monetary policy didn’t address the issue directly, the central bank can still ease restrictions through separate directives.
“Allowing banks to trade would help manage excess liquidity and provide much-needed stability to the market,” he said.
Globally, capital markets serve as a tool for managing investable funds — absorbing liquidity when it’s high and releasing it when scarce.
Strict Sale Limits Discouraging Banks
Even after the one-year holding period, banks can only sell up to 20% of their primary capital worth of shares in a single fiscal year. To sell more, they must wait for the next fiscal year.
Ranabhat emphasized:
“When banks cannot sell freely, they’re naturally discouraged from investing at all.”
He recommends removing the 20% sales limit to encourage greater institutional participation.
Investment Caps Still Apply
Under current rules, banks face these investment caps:
- A maximum of 10% of their primary capital in any one company
- A combined 30% of their primary capital across all shares, debentures, and mutual funds
- A maximum of 10% of the paid-up capital of the investee company
Ranabhat suggests that while these caps are reasonable for risk control, banks should be allowed to sell shares more flexibly once the holding period is over.
The Need for Balanced Reform
Though the monetary policy has been welcomed for its pro-market stance, the failure to address short-term trading flexibility for banks is being viewed as a missed opportunity. Investors, stockbrokers, and bankers continue to urge Nepal Rastra Bank to amend the rigid framework — not by removing investment limits, but by lifting holding and sale restrictions that hinder participation and limit market depth.
