- Nepal Rastra Bank reduced the minimum holding period for bank investments in shares and debentures from six months to 45 days.
- Banks must implement board-approved investment policies and risk management systems before investing in listed securities.
- Existing investment limits remain, but banks must submit detailed monthly reports on their banking and trading book activities.
- This policy change offers banks more flexibility to adjust portfolios without permitting high-frequency short-term share trading.
Kathmandu, Nepal: Nepal Rastra Bank has reduced the minimum holding period for shares and debentures purchased by banks and financial institutions, allowing them to hold such investments for more than 45 days instead of the previous minimum period of six months.
The central bank introduced the change on Thursday by amending the Unified Directive, 2082, applicable to Class ‘A’, ‘B’ and ‘C’ banks and financial institutions.
Under the revised provision, banks can invest in shares and debentures of companies listed on the securities market and hold them for more than 45 days. Investments held for 45 days or less are not permitted. The directive also prohibits banks from using other arrangements to make short-term investments in such instruments.
The change gives banks greater room to adjust their investment portfolios in response to market conditions and their own liquidity and risk requirements. It does not, however, permit banks to operate as short-term share traders.
Before making investments in shares, debentures and other financial instruments, banks must have an investment policy and procedures approved by their board of directors. The policy must set out the objectives and strategy of investment, eligible and restricted instruments, investment periods, risk limits and provisions for taking profits and limiting losses.
It must also specify the basis for classifying investments under the banking book and trading book, procedures for approving investments, selection of eligible counterparties, responsibilities of authorized officials and applicable investment limits.
The revised directive retains requirements aimed at managing conflicts of interest. Banks must have appropriate systems for transactions involving subsidiaries, shareholders with significant ownership and related parties.
Banks are also required to assess the risks associated with their investments, including market and liquidity risks. Regular risk assessments and stress testing must be carried out to identify and manage potential losses.
They must also review the risk profile of institutions issuing the financial instruments in which they have invested. Any breach of investment-related regulatory requirements must be recorded and reported in accordance with the directive.
The reporting requirements have also been clarified. Banks must submit separate monthly reports to Nepal Rastra Bank on investments held in their banking book and trading book. The reports must include the name of the investee company, type of financial instrument, purchase and sale dates, investment amount and profit or loss.
The reduction in the holding period does not change the existing investment limits. A bank can invest up to 10 percent of its primary capital in the shares, debentures or collective investment schemes of a single organized institution. Its total investment in all organized institutions cannot exceed 30 percent of primary capital.
A bank also cannot invest more than 10 percent of the paid-up capital of a single institution in its shares or debentures. Any investment exceeding the prescribed limit must be deducted from primary capital for the purpose of maintaining the required capital adequacy.
Nepal Rastra Bank has separately set the countercyclical buffer at zero percent for commercial banks for fiscal year 2083/84, the same level maintained in the previous fiscal year.
The shorter holding period may make it easier for banks to adjust their securities portfolios without waiting for six months. Its effect on the capital market, however, will depend on how individual banks use the additional flexibility.
Investment decisions will continue to be subject to banks’ internal policies, risk limits, liquidity positions, expected returns and prevailing market conditions. The revised provision therefore changes the permitted holding period, while leaving the broader investment limits and risk-control requirements in place.
