Nepal Rastra Bank Removes Maximum Interest Rate Cap for Microfinance Institutions
July 11, 2025 | Investopaper
The Nepal Rastra Bank (NRB) has removed the maximum interest rate cap for microfinance institutions, allowing them to set interest rates based on their base rate. Effective from Shrawan (mid-July 2025), microfinance institutions can now determine loan interest rates by adding a premium of up to three percent to their average base rate calculated over three months.
This move marks a departure from the earlier regulation, in place since 2073 BS (2016/17), which restricted microfinance institutions from charging more than 15 percent interest on loans.
This reform, announced through a circular issued on Thursday, aims to align the microfinance sector with market-driven principles, addressing long-standing concerns from institutions that the previous cap was incompatible with a market-oriented economy. The NRB’s decision reflects feedback from microfinance institutions, which have argued that the rigid interest rate ceiling limited their operational flexibility and ability to manage financial risks effectively.
The policy change was announced in the mid-term review of the monetary policy for the fiscal year 2081/82 (2024/25), where the NRB declared its intent to implement the base rate system for microfinance institutions starting from Jestha 2082 (May 2025).
