Kathmandu. The Nepal Rastra Bank (NRB) has reduced the minimum holding period for banks and financial institutions to 45 days. The Nepal Rastra Bank (NRB) on Thursday issued a unified directive to the licensed ‘A’, ‘B’ and ‘C’ class banks and financial institutions.

As per the new provision, banks and financial institutions can invest in shares and debentures of companies already listed in the stock exchange exchange for a period of more than 45 days.

The Nepal Rastra Bank (NRB) has also made it mandatory for the banks and financial institutions to implement their investment policies and working procedures only after getting approval from the Board of Directors.

Similarly, there should be a clear policy and working procedure to minimize speculation risk while investing in financial instruments such as shares, debentures, government securities and debentures of Nepal Rastra Bank.

According to the revised directive, banks and financial institutions will have to classify their investments into ‘Banking Book’ and ‘Trading Book’. Such classification has been made on the basis of the nature, purpose and risk of investment.

The banks and financial institutions should also identify, monitor and control possible conflicts of interest with their subsidiaries, shareholders and risk-taking authorities while investing.

The Rastra Bank has also given priority to risk management in the investment of banks and financial institutions. For this, the investment policy has a provision to set limits of ‘Take Profit’ and ‘Stop Loss’.

Similarly, the invested financial instruments will have to be marked to market on a daily basis. Regular stress testing should also be done to assess the potential risk situation. The revised directive also includes a provision for regular internal risk rating of financial instrument issuing institutions.

The banks and financial institutions will have to submit the investment policy and procedures approved by the Board of Directors to the concerned supervision department of the Nepal Rastra Bank. The NRB has made such a provision to make the investment of banks and financial institutions more systematic, transparent and risk-based. The amended provision seems to be aimed at regulating institutional investment by controlling the risk arising from short-term transactions, especially in shares and debentures.