NRB caps penal interest on loans at 2 percent

Published On: August 2, 2016 01:30 AM NPT By: Sagar Ghimire  | @sagarghi

No ABBS fee for domestic transfers up to Rs 200,000
KATHMANDU, Aug 2: Nepal Rastra Bank (NRB) has set a ceiling of 2 percent on penal interest that bank and financial institutions (BFIs) charge their borrowers if they miss loan payment.

Issuing a 54-point amendment to Unified Directives of Fiscal Year 2015/16 for BFIs, the central bank said that the BFIs have to mention a clause of penal interest rate of no more than 2 percent in the loan contract that they sign with borrowers. This provision restricts BFIs from levying haphazard penal interests.

While the earlier circular related to consumer protection and welfare had a provision that required BFIs to mention penal interest rates on loan contract, they were free to fix rates if a borrower missed repayment.

Though commercial banks have been charging around 2 percent penal interest, development banks and finance companies have been extracting up to 4 percent penal interest from borrowers.

"While this will not have a big impact on earning of finance companies, the decision to reduce penal interest might encourage borrowers to miss their installment payment," Saroj Kaji Tuladhar, president of Nepal Financial Institutions Association (NFIA), said. "For example, if there was a 10 percent of interest rate on loan, a borrower will have to pay 14 percent, including 4 percent penal interest. This would have compelled a borrower to repay installment in time.''

"It will now be less compelling for borrowers to repay their loan in time, putting the financial discipline at stake to some extent," Tuladhar, who is the CEO of Goodwill Finance Company Ltd, told Republica.

The central bank has also said that the BFIs cannot charge interest on penal charge.

The amendment has also eased the process for the BFIs to adopt simplified know-your-customer (KYC) process for the saving and current account depositors who make transactions of less than Rs 500,000 annually.

People transferring their money below Rs 200,000 within the country from the same bank will not have to pay any ABBS (Any Branch Banking Services) charges now, according to the new amendment. Earlier, such transfer above Rs 100,000 would incur ABBS charges.

NRB has also adopted some relaxation for banks to open their extension counters. The amendment has paved the way for banks to operate extension counters in municipalities. Similarly, the amendment has also paved the way for banks to operate branchless banking service in municipalities. Earlier, NRB had said that it could issue permit to operate such service only outside metropolitan city, sub-metropolitan city and municipality.

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