In a move aimed at protecting first-time homebuyers from interest rate volatility, the Nepal Rastra Bank (NRB) introduced a directive that prohibits banks and financial institutions (BFIs) from increasing Equated Monthly Installments (EMIs) on home loans—even if interest rates rise in the future.

At first glance, this sounds like a progressive step to support aspiring homeowners. Fixed EMIs promise predictability in an otherwise unpredictable lending environment. But a deeper look reveals troubling implications. This well-intended regulation could end up undermining the very financial system it aims to support.

Understanding the Directive: A Fixed EMI in a Floating Rate World
NRB’s First Home Loan Directive prohibits licensed banks and financial institutions (BFIs) from increasing monthly EMI payments for first-time homebuyers, regardless of future interest rate fluctuations. In principle, this offers borrowers a sense of certainty and affordability. In practice, however, it may be economically unsound and operationally infeasible.

Banks typically price home loans using floating interest rates, meaning EMIs rise or fall in tandem with market conditions. Freezing EMIs in an environment of rising rates places an artificial cap on repayments, distorting credit risk models and creating a mismatch between bank liabilities (deposit rates) and assets (loans ).

नेपाल राष्ट्र बैंक इ.प्रा.निर्देशन नं. ३/०८१, १२. क्षेत्रगत कर्जा सम्बन्धी व्यवस्था, (४) घरजग्गा तथा रियल स्टेट कर्जा सम्बन्धी व्यवस्था : (ई) कर्जाको व्याजदर वृद्धि भएमा पूर्व निर्धारित मासिक किस्ता वृद्धि नगरी कर्जा भुक्तान हुने व्यवस्था मिलाउनुपर्ने ।

The Macro Backdrop: A Volatile Decade
To understand the risk, one must look at Nepal’s interest rate trends over the past decade. The average deposit and lending rates have swung significantly:
Fiscal Year
(Mid-July)        Deposit Rate (%)    Credit Rate (%)
2014                        4.17                          10.51
2015                        3.94                           9.57
2016                        3.28                           8.86
2017                        6.15                          11.39
2018                        6.49                          12.29
2019                        6.60                          12.16
2020                        6.01                          10.11
2021                        4.76                           8.43
2022                        7.41                          11.62
2023                        7.86                          12.30
2024                        5.77                           9.93
2025 (Mid-Apr)       4.45                           8.22

With such volatility, capping EMI payments locks borrowers into an artificially low monthly payment—even if the cost of funds rises for lenders. This sounds borrower-friendly, but the financial math tells another story.

When Good Intentions Clash with Financial Reality
Imagine a borrower who took a NPR 10 million home loan in 2021 with an interest rate of 8.43% over 20 years. Their EMI would be around NPR 86,340. If the interest rate rises to 12.30%, as it did in 2023, the EMI should jump to roughly NPR 110,405. But the directive prohibits such an increase. The only way to maintain the fixed EMI? Extend the tenure beyond 80 years—an absurd proposition for any financial contract.

This case illustrates how the directive prioritizes short-term political comfort over long-term financial sustainability.

Populism Disguised as Policy?
This raises serious questions:
• Was a full impact assessment conducted before rollout?
• Is the directive designed to address a genuine affordability gap, or is it simply a populist move timed to curry favor with the public?
• If banks absorb losses or informally restructure loans, who bears the regulatory and financial accountability?
• Are borrowers being misled into thinking their financial burden won’t grow—even when the true cost of borrowing increases?

Good policy must be grounded in data, not sentiment.

Risks for Banks and Borrowers Alike

For Banks:
• Rising Credit Risk: Fixed EMIs limit the ability to reprice loans, affecting profitability and provisioning.
• Regulatory Arbitrage: BFIs may quietly restructure loans to comply, distorting true risk assessments.
• ALM Stress: Banks face losses if deposit rates outpace the returns on fixed-EMI home loans.

For Borrowers:
• Illusion of Affordability: A fixed EMI feels safe but can mask rising interest liabilities.
• Ballooning Tenures: To accommodate interest rate hikes, banks may extend loan durations indefinitely—raising the total repayment amount.
• Credit Score Fallout: Informal restructurings could affect the borrower’s credit history, making future access to credit more difficult.

The Way Forward: Real Reform, Not Reactive Rules
If NRB’s goal is to make homeownership more accessible, there are better ways to do it without distorting the fundamentals of banking:
1. Flexible EMI Bands: Allow EMIs to adjust within pre-defined thresholds rather than freezing them altogether.
2. Cap-and-Floor Interest Rates: Introduce ceiling and floor mechanisms to manage extreme rate fluctuations without eliminating market discipline.
3. Subsidies for Vulnerable Groups: Targeted interest subsidies or partial loan guarantees for low-income borrowers would offer real support without compromising financial health.
4. Stakeholder Engagement: Bring together bankers, economists, and consumer rights groups before formulating sweeping directives that affect both ends of the credit spectrum.

Conclusion: Sensibility Over Sentiment
Central banks must strike a careful balance between financial inclusion and financial integrity. NRB’s directive, while noble in its intent, may erode trust in the long run by promoting unrealistic expectations and weakening institutional resilience.

Protecting borrowers from risk does not mean denying reality. Instead, Nepal’s financial system needs reforms that are economically grounded, technically sound, and socially inclusive. Anything less runs the risk of turning policy into populism—and doing more harm than good.

NRB has the authority to investigate how the directive was implemented in 2023, but doing so requires the courage to confront uncomfortable truths. Striking a balance between financial realities and political optics is essential if policy is to genuinely serve the public interest—not merely seek popularity.

Can NRB openly disclose how the directive held up amid the sharp interest rate hike in 2023? Such transparency is crucial to rebuild trust and guide effective future policymaking—yet whether this level of candor is politically and institutionally achievable remains an open question.