Why NRB’s First Home Loan Directive Deserves a Rethink

Nepal Rastra Bank’s (NRB) First Home Loan Directive promised stability for first-time homebuyers by freezing monthly EMIs, even when interest rates rose. While the policy aimed to enhance financial inclusion and promote responsible borrowing, its implementation revealed operational challenges and regulatory gaps that policymakers, banks, and borrowers need to understand.

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The Policy Intent

Originating from Unified Directive 2076, the First Home Loan Directive sought to:

• Help first-time homebuyers access housing finance

• Encourage responsible use of loans

• Support the growth of consumer lending

The intent was socially positive, not politically motivated. Yet, issuing a fixed-EMI rule without fully accounting for interest rate volatility created practical challenges for both banks and borrowers.

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Interest Rate Volatility in Nepal

Nepal’s deposit and lending rates have fluctuated frequently, sometimes quarterly, making fixed EMIs difficult to sustain. Key trends from 2015–2025:

Example: A NPR 10 million loan in 2021 at 8.43% over 20 years had an EMI of ≈ NPR 86,340. By 2023, with lending rates at 12.30%, the EMI should have been ≈ NPR 110,405.

Challenge: The directive blocked any increase, leaving banks to manage unsustainable financial stress.

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Non-Implementation Cases

Investigations revealed that some banks did not fully implement the fixed-EMI provision in 2023, and some borrowers still faced higher EMIs.

Key issues identified:

• Operational Challenges: Frozen EMIs conflicted with rising lending costs.

• Regulatory Opacity: NRB’s 2023 financial report may have understated systemic risks, masking implementation gaps.

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Balancing Intent and Reality

The directive demonstrates a key lesson: policies must align social objectives with financial realities.

While NRB and banks acted with good intentions—facilitating homeownership and supporting consumer lending—the frozen EMI structure exposed operational and systemic vulnerabilities that cannot be ignored.

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The Way Forward

To make housing finance policy effective and sustainable:

1. Transparent Reporting: NRB should publicly disclose how the directive performed, including cases of non-compliance.

2. Practical Policy Design: Balance borrower protection with bank risk management and interest rate fluctuations.

3. Continuous Oversight: Ensure compliance is operationally feasible, not just paper-level.

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Conclusion

The First Home Loan Directive was socially beneficial but exposed hidden risks due to interest rate volatility, inconsistent implementation, and regulatory opacity.

✅ Policy intent must be matched by transparency, feasibility, and accountability to truly serve citizens and support a resilient financial system.

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