Nepal Rastra Bank (NRB) has stepped up efforts to bar banks and financial institutions (BFIs) from showing the capitalized interest during the moratorium period of outstanding loans in their profit account.
The NRB in this regard has prepared a draft on ‘Interest Capitalization of Moratorium Period.’ Giving a deadline of January 27, the central bank has sought suggestions from the general public.
The NRB has considered 11 types of production businesses for interest capitalization in moratorium provision. These include hydropower production and distribution, clinker-based cement factories, drug manufacturers, cable cars, sugar production, dairies, medical colleges that received letter of intent from the government, standard hotels, hospitals, long-term agricultural projects related to fruits, spices and herbals and pulp-based paper manufacturers.
Moratorium period is the time span in which the firms do not have to pay back the interest and loan amount to the BFIs. Based on the nature of the projects, the BFIs have been allowing different moratorium periods on the loans taken by the projects.
As of now, the BFIs have been maintaining the capitalized interest on such loans in the profits, to inflate the volume of their earnings.
The central bank has been prohibiting banks from distributing dividends based on such financial assets until they are realized in cash. However, the BFIs were compelled to clear their tax liabilities on such capitalized interest which are yet to be realized in cash.
In the proposed provision, the NRB has asked the BFIs to transfer cash into the profit and loss account only after the cash is realized on the capitalized interest amount. The BFIs will have to maintain the interest amount of the moratorium period to be capitalized under a separate heading ‘Interest Capitalized Term Loan.’ Such an amount should be maintained in a separate reserve account of the financial report.
