Loan Financing in Nepal (2080)

Loan Financing in Nepal refers to the process through which Funds are obtained from Financial Institutions, including Banks, Non-Banking Financial Institutions, and Large-Scale Lenders, where it is promised to repay the Borrowed Amount along with Interest over a Specified Period. In the context of Nepal, Loan Financing facilitates Infrastructural Development, Public Procurement Projects such as Hydropower, and Economic Growth.

1. Legal Framework of Loan Financing in Nepal

1.1 Nepal Rastra Bank Act 2002

Nepal Rastra Bank 2002 has provisioned for the Establishment of Nepal Rastra Bank, the Central Bank of Nepal. It has been institutionalized for Credit Control, Inspection and Supervision of Financial Institutions, and Determination of Loan Financing.

1.2 Bank and Financial Institutions Act 2006

Bank and Financial Institutions Act 2006 deals with Nepal’s Oversight of Banks and Financial Institutions. It has codified the Fundamental Elements of Loan Financing: Credit Supply, Credit Recovery, Issuance of Directives by NRP, and Penalties for Violation.

1.3 Banking Offence and Punishment Act 2007

Loan Financing involves fraudulent Activities such as False Financial Statements and Misuse of Loan Financing. It has established several Activities of Loan and Credit Financing in Nepal as Illegal and Furbished Punishment to regulate such conduct.

1.4 Company Act 2006

Company Act 2006 is the Substantive Corporate Law of Nepal that regulates and governs Operating Companies in Nepal.

1.5 Insolvency Act 2006

Insolvency Ac 2006 has laid down the Procedure and rules for Handling Insolvency Cases involving Loan Financing and debt repayment failure in Nepal.

1.6 Debt Recovery of Bank and Financial Institutions Act 2001

It governs the Loan Repayment and Debt Recovery process by Financial Institutions of Nepal along with the rights and responsibilities of Both Creditors and Debtors.

1.7 Negotiable Instruments Act 1977

Negotiable Instruments Act 1977 has provisioned with the Regulation of Negotiable Instruments such as Promissory Notes, Bills of Exchange, etc., which is common in Loan Financing Procedures.

1.8 Unified Directives of Nepal Rastra Bank

The Unified Directives of Nepal Rastra Bank has instructed Financial Institutions with the Complete Procedure during Loan Financing in Nepal while considering International Standards.

2. Legal Process of Loan Financing in Nepal

The Legal Framework of Loan Financing in Nepal has several complex Facets that interchange Various Laws, Regulations, and Guidelines. An Overview of the Basic Procedure of Loan Financing in Nepal is as follows:

Step 1: Submit a Loan Application to a Financial Institution

The Borrower must submit a loan application to a financial institution, along with necessary documents like identity proofs, income statements, business plans (for business loans), and collateral documents.

Step 2: Credit Review By the Financial Institution

The financial institution conducts a credit assessment to evaluate the Borrower’s creditworthiness. Loan Financing is preceded by the Evaluation of Collateral for Security, Assessment of Financial Statements, and Past Transactions with the Institution.

Step 3: Signing of Loan Agreement

Upon approval, a loan agreement is signed. The terms include the loan amount, interest rate, repayment schedule, and collateral details. The loan is then disbursed to the Borrower.

Step 4: Assurance of Collateral and Security

Collateral refers to the Property as Land, House, or other Monetary Instruments issued as Security if the Borrower fails to pay the loan. After signing the Loan Agreement, the Financial Institution evaluates the Collateral’s Market Price and finalizes it.

Step 5: Compliance with NRB Guidelines

During the Procedure of Loan Financing in Nepal, both the Creditor and Borrower must act in Compliance with the Unified Directives of Nepal Rastra Bank while assessing the Lending Limits and the Collateral Damages.

3. Challenges of Loan Financing in Nepal

3.1 High-Interest Rates

Nepalese Interest Rates in Risky Loan Financing exceeds two digits. Despite several regulatory gaps, interest rates exceed the Financial Norms, resulting in costliness to the Borrowers.

3.2 Regulations

Nepalese Loan Financing Regulations have yet to be codified. Banks and financial institutions usually set the specific terms and conditions of the loan, and failure in loan repayment often results in the seizure of collateral.

3.3 Collateral Valuation

Loan Security usually manifests in the form of collateral whose Valuation and Verification are conducted by the agents of the Bank. Therefore, it brings significant ups and downs in Loan Security.

4. Conclusion

Loan Financing in Nepal is governed by a Complex Interplay of Rules and Regulations codified to protect the Interests of Consumers. However, Financing is significantly variable because of the Flexible Interest Rates and lack of competent authority for Collateral Security.

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