Projects in all sectors will be allowed to capitalize interest accrued until the cash impact from the start of production (grace period) has been removed. This facility, which was previously only available for projects in specified sectors, has been implemented by the Nepal Rastra Bank for projects in all sectors. The Nepal Rastra Bank issued the directive in a circular on Wednesday.

‘Banks and financial institutions may capitalize interest accrued during the grace period until the cash inflow from the commercial operation/production of the project is mentioned in the loan agreement, while disbursing loans to projects of a long-term nature,’ the directive states.

Earlier, there was a provision that interest accrued during the grace period could be capitalized only in the case of loans disbursed to projects in specified sectors. The Nepal Rastra Bank has directed that banks and financial institutions should formulate and implement separate procedures regarding interest capitalization. The Nepal Rastra Bank has clarified that a long-term project means a project that takes at least 2 years to start cash inflow from the commercial operation/production of the project.

Earlier, only projects in specific productive sectors were getting this facility, but now projects in all sectors have been opened, said NRB spokesperson Guru Prasad Poudel. ‘Currently, this facility has been given to projects in all sectors, but the concerned bank should make a separate procedure regarding interest capitalization and the decision on capitalization should be passed by the board of directors of the bank and financial institution,’ he said. ‘This directive has also sought to make banks and financial institutions more responsible.’

While making the procedure, the areas where interest will be capitalized, a realistic analysis of the project’s cash flow, the terms and conditions related to the payment of capitalized interest, the proposed capital plan and its basis, and the proposed debt-equity ratio should be included.

The decision to capitalize interest in this way should be passed by the board of directors of the concerned bank and financial institution,’ said NRB’s directive.

‘If interest is capitalized by extending the grace period once fixed, the loan will be considered as restructured and a minimum 25 percent loan loss provision will have to be maintained by classifying the loan accordingly,’ the circular states.

However, in the case of projects that have not been operated at full capacity even after the completion of the hydropower project and production has started due to the lack of construction of the transmission line, the directive states that the interest amount can be partially capitalized to the extent that it is not covered by the net sales income until the transmission line is constructed and put into operation. The Rastra Bank has clarified that such loans will not be considered as restructured.

Similarly, this facility can be provided even if it takes at least 2 years to restart the business due to damage to the extent that the project cannot be operated due to circumstances beyond the control of the borrower, such as natural disasters or riots. If the entire principal and interest in excess of the amount of such loans are recovered and a grace period is provided, the interest accrued during the grace period can be capitalized. Such loans will be considered restructured and there is a provision to maintain a minimum loan loss provision of 12.5 percent by classifying them accordingly. Interest exceeding the amount of the restructured or rescheduled loan cannot be capitalized.