Nepal Rastra Bank (NRB) has tightened regulations governing hire purchase companies to prevent excessive interest charges, improve transparency and strengthen financial discipline.
Under the sixth amendment to the Policy and Procedural Arrangements for Approval of Hire Purchase Loan Companies, 2013, firms must determine customer interest rates based on their cost of funds, taking into account the cost of equity and weighted cost of debt.
Companies must publicly disclose their interest rates and submit the basis for rate determination to NRB within three days. Interest rates cannot be changed by more than 2 percentage points from the publicly disclosed rates.
The new rules cap the loan-to-value ratio for vehicle loans at 80 percent and require companies to diversify investments across multiple vehicle brands. No more than 30 percent of net assets can be lent to a single borrower or group.
For vehicle loans exceeding Rs. 2.5 million, borrowers must provide a PAN. Hire purchase companies must maintain minimum paid-up capital of Rs. 300 million and cannot lend more than 10 times their net assets.
Penalty interest on overdue instalments has been capped at 2 percent per annum, while compound penalty interest has been prohibited.
Companies must allocate 20 percent of annual net profit to a reserve fund until it reaches twice their paid-up capital, after which they must allocate 10 percent annually.
The revised provisions also allow operating licences to be renewed every 10 years.
