KATHMANDU, Aug 12: Nepal Rastra Bank (NRB) has tightened regulations on hire purchase companies, restricting them from charging excessive interest rates. The central bank has introduced stricter provisions aimed at ensuring transparency and strengthening financial discipline.
With the sixth amendment to the Policy and Procedural Arrangements for Approval of Hire Purchase Loan Companies, 2013, the central bank has clarified rules related to interest rates, fees, share transfers, and overall regulation of hire purchase firms.
Under the new arrangement, companies involved in issuing hire purchase loan must determine interest rates charged to customers on the basis of the “cost of funds.” This calculation requires companies to consider both the cost of equity and the weighted cost of debt.
Revised interest rate corridor system introduced
Companies are required to make public disclosures of their interest rates and submit details of rate determination to NRB’s supervision unit within three days. Furthermore, while fixing loan rates, hire purchase firms cannot increase or decrease interest rates by more than two percent from the rates already made public.
The new system has set a ceiling of 80 percent on the loan-to-value ratio for vehicle loans. This provision is expected to systematize investments that were previously made largely on the basis of accessibility and discretion.
To end monopolistic practices, NRB has introduced a rule requiring hire purchase companies to diversify their investments. No company can invest exclusively in a single brand of vehicles; they must mandatorily expand investment across multiple brands. In addition, no more than 30 percent of a company’s net assets can be disbursed to a single customer or group.
In an effort to make financial transactions more transparent, borrowers must mandatorily submit a permanent account number (PAN) when taking vehicle loans exceeding Rs 2.5 million.
Strict provisions have also been introduced to ensure the financial strength of hire purchase companies. Firms are required to maintain a minimum paid-up capital of Rs 300 million, and they cannot issue loans exceeding 10 times their net assets.
The NRB has imposed restrictions on penalty interest charged to borrowers who fail to pay installments on time. Companies will not be allowed to charge more than 2 percent per annum as penalty interest. Additional interest can only be levied on the principal amount delayed for payment. The central bank has also completely prohibited the practice of charging compound interest as penalty fees.
Hire purchase companies must now allocate at least 20 percent of their net profit each year to a reserve fund. This reserve must be maintained until it doubles the company’s paid-up capital. After that threshold is reached, the company must continue to set aside 10 percent of annual net profit for reserve fund, which cannot be used for other purposes without prior approval from the central bank.
While tightening financial discipline, NRB has introduced flexibility in the renewal process. Hire purchase companies will now be allowed to renew their operating licenses every 10 years.
