Nepal Rastra Bank Tightens Rules for Hire Purchase Finance Companies

Nepal Rastra Bank (NRB) has revised its regulatory framework for companies providing hire purchase loans, introducing a series of new provisions aimed at strengthening financial discipline, transparency and consumer protection. The Bank’s Bank and Financial Institutions Regulation Department has amended the Policy and Procedural Provisions for Granting Approval to Hire Purchase Loan Companies, 2070 for the sixth time. Under the revised framework, hire purchase companies must maintain a minimum paid-up capital of Rs. 300 million in ordinary shares, while existing companies must adjust their capital structure within the prescribed timeframe. Hire purchase loans cover financing for vehicles, machinery, equipment and household appliances such as washing machines, refrigerators and vacuum cleaners, with ownership transferred to the customer only after all installments have been paid. Companies must include the term “Hire Purchase” in their names and operate as public or private limited companies. The new rules also limit borrowing by hire purchase companies to a maximum of 10 times their net worth, while loans against collateral cannot exceed 80% of its value, subject to NRB’s applicable Loan-to-Value (LTV) requirements for vehicle financing. A company cannot lend more than 30% of its net worth to a single borrower or group. Interest rates must be based on the company’s cost of funds, publicly disclosed and reported to the NRB within three days. Companies cannot increase or decrease the published interest rate by more than two percentage points, while loan processing fees are capped at 1%. Penal interest on overdue installments cannot exceed two percentage points annually, and no additional interest can be charged on penal interest. Hire purchase companies are prohibited from accepting deposits or savings from the general public, providing loans other than hire purchase financing, or engaging in unrelated businesses. Market makers and stockbrokers are also barred from becoming founders of such companies. The revised framework further strengthens governance requirements by making a bachelor’s degree mandatory for CEOs or managing directors and subjecting founders and directors to a Fit and Proper Test. Individuals involved in criminal offenses, blacklisted persons or those with outstanding tax liabilities may be deemed ineligible. Companies must submit detailed quarterly reports to NRB within 15 days of each quarter-end and publish audited financial statements within five months of the end of the fiscal year. Loans overdue for up to six months will be classified as doubtful and require 50% provisioning, while loans overdue for more than one year will be classified as bad loans and require 100% provisioning. NRB has warned that companies failing to comply with the new provisions could face cancellation of their approval and legal action.