Kathmandu. KATHMANDU: Nepal Rastra Bank (NRB) has made major changes in the interest capitalization system of banks. The central bank has amended this provision by amending the integrated directive issued for banks and financial institutions.
Provision for Interest Capitalization after Amendment{
Banks and Institutions will be able to capitalize the interest matured during the grace period until there is cash inflow from the commercial operation÷production of the project as stipulated in the loan agreement.
The licensed institution shall formulate and implement procedures incorporating the following grounds in connection with interest capitalization:
(a) Areas where interest is capitalized,
(b) A realistic analysis of the cash flow of the project,
(c) Terms and conditions relating to payment of registered interest,
(d) The proposed capital plan and the basis thereof,
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(e) Proposed loan capital ratio.
In addition, the decision to capitalize the interest will have to be taken by the Board of Directors of the concerned licensed institution.
Once the interest is capitalized by extending the grace period, the loan will be deemed to have been restructured and the loan will have to be classified accordingly and a minimum of 25 percent loan loss provision should be maintained.
However, in the case of projects that have not been able to operate in full capacity due to the construction of the transmission line even after the completion of the hydropower project, the interest amount can be partially capitalized to the extent that the net sale income does not cover the construction of the transmission line. Such debt shall not be deemed to have been restructured.
If it takes at least 2 years to resume the business due to natural calamities or circumstances beyond the control of the borrower, the maturity interest can be capitalized if all the principal and interest exceeded by such loan is recovered and the grace period is provided. Such loans will be treated as restructuring and a minimum of 12.5 percent credit loss should be maintained by classifying them accordingly.
Interest that has exceeded the maturity of the restructured or rescheduled loan cannot be capitalized.
While capitalizing the interest on the grace period, the amount of interest capitalized will have to be separately accounted for under the head of Interest Capitalization Term Loan (ICTL).
The concerned banks and financial institutions may determine the payment period of ICTL after analyzing the cash flow of the project.
Clarification: Long÷term project means a project that takes at least 2 years to start cash flow from commercial operationproduction of the project.
Previous Interest Capitalization Provision
The maturity interest will not be allowed to be capitalized during the grace period of the project loan. Provided that, the capitalization of interest on the basis of need and justification shall not be deemed to have been deemed to have been hampered in the following priority areas:
(a) Energy generating industries, including hydropower generation, transmission and distribution,
(b) Industries related to the production of clinker and cement using domestic raw materials,
(c) Pharmaceutical industry,
(d) Cable Car Industry,
(e) Industries related to sugar production,
(f) Dairy products manufacturing industry,
(g) Medical colleges which have received a letter of intent from the concerned body of the Government of Nepal,
(h) Tourist Standard Star Hotels,
(i) Hospital,
(j) Long-term agricultural projects including fruits, spices, herbs and
(k) Pulp and paper industry using indigenous raw materials.
In the case of hydropower projects which have not been able to operate in full capacity due to the construction of the transmission line but have not been constructed, the interest amount can be partially capitalized to the extent that the net sale income does not cover the construction of the transmission line.
The Board of Directors of the concerned bank and financial institution shall decide on the capitalization of the interest.
Interest on restructured or rescheduled loans will not be allowed to be capitalized.
While capitalizing the interest of the grace period, the capitalized interest amount will have to be accounted for separately under the head of Interest Capitalization Term Loan (ICTL).
The concerned banks and financial institutions may determine the payment period of ICTL after analyzing the cash flow of the project.
