NRB allows BFIs to peg interest rates on such loans with their base rate

KATHMANDU, Feb 1: Farmers getting loans from the bank and financial institutions (BFIs) under subsidized interest scheme of the government will now have to bear higher borrowing cost. 

The interest rate of such subsidized loans is now likely to increase as the Nepal Rastra Bank (NRB) has issued a new circular, allowing bank and financial institutions (BFIs) to peg their interest rates with the base rate. 

The base rate is the rate of interest that banks use as a basis when they are calculating the rates that they charge on loans. They fix their premiums on top of the base rate while floating loans.  

While the NRB has said that it will continue to provide a subsidy of 5 percentage points of interest rates on such loans, the new rule will end the borrowing facility whereby BFIs were not allowed to charge more than 10 percent interest rates on such subsidized loans. Earlier, BFIs were prohibited from charging more than 10 percent interest rates on the subsidized loans to farmers. 

Issuing a circular on Wednesday to make an amendment to the working procedure for providing subsidy on the interest of commercial farming and livestock loans, the NRB said that BFIs can fix interest rates on subsidized loans according to their base rate. 

As the base rate of banks is increasing due to higher interest rates on deposit that BFIs are providing in the wake of shortage of lendable fund, the interest rates on subsidized agro and livestock loans will also rise. 

The government had announced the scheme, through the budget speech of Fiscal Year 2014/15, to provide subsidy on interest on certain loans floated to youths on farming and agriculture sector. While the maximum interest rates on such loans were capped at six percent at the beginning, with a subsidy of four percentage points, the interest rate cap was later increased to 10 percent along with the increase in subsidy to 5 percentage points in FY 2016/17.

Under the scheme, which was introduced to encourage commercial agro and livestock farming, particularly among youths, BFIs float loans for commercial agro and livestock farming businesses including vegetable production, processing and storage, floriculture business, livestock farming, and fishery, among other enterprises. 

The maximum loan that a borrower can get from BFIs under this scheme is Rs 50 million. BFIs can float loans higher than Rs 50 million by getting approval from the monitoring and coordination committee formed at the central level and the district level. 

 
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• subsidized
 
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• loans