June 24, Kathmandu — Banks and financial institutions can now capitalize interest accrued during the grace period until projects financed by their loans become operational. The central bank has opened the way for interest capitalization by setting various conditions, applicable until the project’s cash flow has begun.
On Wednesday, the central bank issued a directive stating that when providing loans for long-term projects, interest accrued during the grace period—before the project becomes commercially operational or begins generating cash flow—can be capitalized if specified in the loan agreement. The directive also emphasizes the need to establish proper procedures for capitalizing interest.
The central bank requires that interest capitalization be carried out only after clearly defining the sectors where it applies, conducting a realistic analysis of the project’s cash flow, and setting clear terms for repayment of the capitalized interest. Additionally, the proposed capital plan, its basis, and the suggested loan-to-equity ratio must be transparently detailed. The decision to capitalize interest must be approved by the board of directors of the concerned institution. If the predetermined grace period is extended and interest continues to be capitalized, such action will be considered a loan restructuring.
Regarding loan classification, a minimum provision of 25 percent for loan loss must be maintained. However, a different arrangement applies to hydropower projects that have begun production but where the transmission line is yet to be constructed. According to the central bank, interest accrued during the period before the transmission line is completed—and the project is non-operational—can be partially capitalized to the extent that the revenue from actual sales has not met debt servicing requirements. Such loans will not be considered restructured.
The central bank has also facilitated provisions for circumstances where natural disasters, civil unrest, or other uncontrollable factors cause damage that delays project operation. In such cases, if restarting operations is expected to take more than two years and the loan repayment is overdue, interest accrued during the grace period can be capitalized instead of collected. These will be considered valid loan restructurings and require maintaining a minimum 12.5 percent provision for loan loss. However, interest on loans already restructured or rescheduled and overdue cannot be capitalized.
The directive further states that capitalized interest must be recorded separately in accounting books. The repayment period will be determined by the concerned banks and financial institutions based on an analysis of the project’s cash flow. Long-term projects are defined as those requiring at least two years before commercial operation or production begins to generate cash flow. Banks also have the authority to freeze a customer’s account at their discretion.
In efforts to reduce financial crimes, banks can freeze accounts on a short-term basis upon oral or written request from investigation authorities. Banks and financial institutions must provide 24-hour daily services to facilitate such actions and must display designated contact numbers on their websites. When requested by investigative authorities probing illegal activities, banks are required to promptly provide the necessary information.
