NRB Issues New Circular on Collateral Auctions, Provisioning, Loan Adjustments, Blacklisting, and Branch Adjustments

Nepal Rastra Bank (NRB) has issued a circular adopting a more flexible approach to loan classification and related regulatory arrangements for banks and financial institutions. The key provisions are as follows:

1. Loans will no longer be required to remain classified as bad if they are regularized after the collateral auction process has begun.

2. This provision will not apply to non-renewable short-term working capital loans exceeding Rs. 2 Arba under the watchlist category that have not been converted into consortium financing, even if pass-through agreements are in place.

3. Banks may revise installment amounts due to changes in interest rates, provided the borrower submits a written request. Such revisions can be made at most once a year after assessing the borrower’s income and must be supported by evidence of expanded project production capacity.

4. If loan recovery is not possible, banks and financial institutions may sell pledged collateral to recover outstanding principal and interest.

5. Where collateral remains unsold despite completing the auction process at least three times, the concerned institution will be required to acquire the asset itself.

6. Banks and financial institutions must develop and implement procedures to manage foreign travel of Board Chairpersons, Directors, and Chief Executive Officers, with such travel requiring approval from the Board of Directors.

7. When acquiring non-banking assets to ensure full recovery of receivables, institutions must obtain a written commitment from the borrower relinquishing any claim over the asset.

8. In cases of erroneous blacklisting, the Chief Executive Officer of the concerned institution may decide and request immediate removal from the blacklist, ensuring no record of blacklisting remains.

9. Individuals or entities removed from the blacklist under this provision will not be considered as having been blacklisted.

10. Details of such erroneous blacklisting cases must be presented to the Board of Directors on a quarterly basis.

11. Prior approval will be required before closing offices, relocating branches, merging or adjusting branches, or changing addresses.

12. NRB approval will not be required for branch adjustments within metropolitan cities.

13. Banks and financial institutions must publish a notice at least 90 days in advance before adjusting any branch.

14. If two or more branches are adjusted, institutions must not charge any fees to customers who choose to settle their loans or discontinue services due to the adjustment.

15. Banks will now be allowed to take ownership of pledged collateral only after it fails to sell in at least three auction attempts.

16. Previously, banks were required to accept collateral as non-banking assets if it remained unsold after two auctions.

17. NRB has removed the requirement of 100% provisioning once non-banking assets are booked, which is expected to reduce banks’ provisioning burden.

18. Loan restructuring or additional loss provisioning will not be required in certain cases, including:
a. Reduction in installment amount or number of installments due to advance repayment,
b. Changes in loan tenure resulting from floating interest rate adjustments,
c. Changes in installment amounts due to interest rate revisions,
d. Provided such changes are made at the borrower’s written request, supported by income analysis, and occur no more than once a year.