Kathmandu. KATHMANDU: Nepal Rastra Bank (NRB) has made the operation and regulation of companies providing hire purchase loans more systematic and stricter. Nepal Rastra Bank (NRB) has issued a new provision on minimum paid-up capital, loan limit, resource mobilization, interest rate and deposit collection for such companies.

As per the new provision, the minimum paid-up capital of the company should be Rs 30 crore. A company wishing to issue hire purchase loan must be registered under the Companies Act, 2063 BS and prior approval from Nepal Rastra Bank (NRB) before issuing loan.

Such companies will have to mention ‘Hire Purchase Pvt. Ltd.’ or ‘Hire Purchase Limited’ after their name. The companies already in operation have to change their name within the stipulated time and inform the Nepal Rastra Bank.

Nepal Rastra Bank (NRB) has also set a limit on the resource mobilization of hire purchase companies. Companies will not be allowed to borrow or borrow more than 10 times their net worth. Similarly, loans can be issued up to 80 percent of the value of the collateral. For vehicles, the loan-to-value ratio fixed by the Nepal Rastra Bank will be applicable to the banks and financial institutions.

A maximum of 30 percent of the company’s net worth can be disbursed to a single customer or group of customers. This is expected to limit the risk of excessive debt concentration in a single customer or group.

When determining interest rates, companies will have to factor in their cost of funds. While approving the loan, only up to 1 percent of the approved loan can be charged as service charge. Similarly, in case of delay in the payment of interest on the loan, an additional interest of up to 2 percent per annum can be charged.

As an important aspect of the new system, the hire purchase company has been completely banned from collecting deposits and savings from the public. Such companies will not be allowed to carry out any business activities other than the issuance of hire purchase loans. This will clarify the scope between the hire purchase company and the banks and financial institutions that collect deposits.

Based on the status of loan recovery, the hire purchase company will have to classify the loan and manage the loss. Loans that have exceeded the deadline for 6 months will be classified as good. Loans that have exceeded the deadline from 6 months to 1 year should be classified as suspicious and 50 percent loss should be managed. Loans that have exceeded the deadline for more than a year should be classified as bad loans and hundred percent loss should be managed.

The Nepal Rastra Bank has also set the qualifications for the management of the company. To become the CEO or Managing Director of the company, you must have at least a bachelor’s degree. Similarly, the hire purchase company should not depend on one brand but invest in different brands of goods.

The license of the company has to be renewed every 10 years. Nepal Rastra Bank (NRB) has the authority to conduct on-site and non-on-site inspections of hire purchase companies at any time. Nepal Rastra Bank (NRB) has made provisions to take action against those found violating the regulatory provisions and cancel the company’s license if necessary.

The new arrangement is aimed at strengthening the financial capacity of companies involved in hire purchase loans, improving risk management and protecting the interests of customers. In particular, the provision of minimum paid-up capital of Rs 300 million, restrictions on deposit collection, tightening of loan limit and loss management will bring the operation of hire purchase companies under further regulation.