Borrowers, who were informed about changes in lending rates at a very short notice, may soon get some relief, as the Nepal Rastra Bank (NRB) is making preparations to bar banks and financial institutions from revising the credit rates in an arbitrary manner.

The NRB, the central bank and the banking sector regulator, has said banking institutions must inform borrowers about hike or fall in lending rates 45 days in advance. This provision applies to loans with tenure of more than a year. If tenure of the credit is less than a year, a 30-day notice must be served prior to revising the interest rates.

Revisions to lending rates, however, should not be made more than twice a year, says the consultative paper on Interest Determination and Revision Criteria floated by the NRB. Also, lending rate should not be revised within first six months of issuance of credit.

“We are currently seeking suggestions on proposals we have floated. All the stakeholders of the banking sector are welcome to lay their recommendations within a week,” NRB Spokesperson Narayan Prasad Paudel said. The NRB, according to Paudel, will refer to these recommendations while framing a policy on lending rates.

The NRB proposed to make these changes following complaints about sudden hike in credit rates, which tend to hit the budget of businesses and households. Recently, banks and financial institutions had raised lending rates by 1 to 2 percentage points after facing shortage of loanable funds.

Banks and financial institutions here generally inform about hike in credit rates through text messages, without holding prior consultation with borrowers. Such hikes hit salaried people and businesses with stable cash flow, compelling them to make compromises in other areas.

If proposals floated by the NRB are approved, bankers must explain parameters based on which interest rates are fixed. “The institutions should also disclose the formula based on which credit rates are determined,” says the consultative paper, adding, “Banks and financial institutions should also inform borrowers whether interest rates on credit are adjustable, fixed, floating or hybrid.”

Currently, almost all of the banks and financial institutions here charge floating interest rates on loans they provide. Lately, few banking institutions have started floating hybrid interest rates, under which credit rates are fixed for first few years before floating interest rate kicks in.