KATHMANDU, August 24: Nepal Rastra Bank (NRB) has tightened the noose on the loans being provided by the banks and financial institutions (BFIs) based on the working capital of firms.

A working capital loan is taken to finance day to day operation of a company. These loans are not issued to buy long-term assets or investments. In this category, Nepali banks issue cash credit, short-term loans, import-export related loans and term loans.

Issuing a Working Capital Loans Related Guideline 2022 on Tuesday, the central bank has maintained two slabs for the BFIs when they issue loans against the working capital. According to the new provision, if a firm has an estimated transaction of Rs 20 million or less per year, it will be eligible to get loan only up to 20 percent of the turnover amount.

However in special cases, the BFIs can issue up to 40 percent of the annual transaction amount to the small firms having the aforementioned amount of transaction. “For the purpose, the BFIs need to assess the components like operating cycle, cash conversion cycle, day sales outstanding, inventory conversion period, lead time and accounts payable period, among others,” reads the guideline.

NRB has asked the BFIs to evaluate the firm’s paid up capital to carry out real time analysis of the credit limit and drawing power while issuing loans to the small firms. The maturity period of such credit should be of maximum one year.     

NRB has also capped the working capital loan for a big firm that has an estimated annual transaction of more than Rs 20 million. According to the NRB guideline, the BFIs first need to analyze the permanent working capital needs and fluctuating working capital needs of the big firms while issuing loans to such firms.

Based on the assessment of fluctuating working capital needs, the BFIs can issue a maximum of 25 percent of the annual transaction amount for the maturity period of up to one year. If the credit is demanded for the permanent working capital needed by the firm, the BFIs can issue term loans with the maturity period of at least five years’ period.

The firm looking for the working capital loans should submit their financial statements of the past five years. Similarly, the annual transaction amount is estimated by looking at the annual turnover of the past three years of the proposed firm. If the firm has the history of less than three years of its establishment, the BFIs can fix the annual transaction limit as per their policy on lending against working capital.    

The firm receiving a working capital loan should utilize the credit amount for commercial purposes. It cannot use the amount in cash transfer or to settle its financial liabilities including payments to the business partners and employees, among others. “If any firm is found to be using the working capital loan in payments to their parties concerned, BFIs need to list such loan amounts under the bad debt” reads the guideline.

According to an NRB official, the central bank has tightened the provisions of working capital loan suspecting that such loans are mainly used for imports. “The unproductive use of such loans has hit further the liquidity position in the banking system while also depleting foreign currency reserves,” the source said. NRB’s new rule will come into effect from October 18.

Possible impact on businesses

Private sectors have criticized the new loan policy of the central bank. They have maintained that the new provision will reduce the demand for loans, adversely affect production and trading business and shrink possibilities of employment generation. 

President of Nepal Chamber of Commerce Rajendra Malla said the new rule will further shrink the business transactions that have been in recovery phase in the post-pandemic period. “In addition, entrepreneurs will be unable to clear the loan amount just in the maturity period of one year,” he said.

Former Vice President of the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) Umesh Lal Shrestha said the central bank’s policy to facilitate micro enterprises at the cost of small and medium level industries will eventually affect the country’s target of achieving high economic growth.        

 
• working_loan
 
• NRB
 
• firms