‘Fit and Proper Test’ Made Mandatory for Hire Purchase Company Founders; License Validity Set at 10 Years
Central Bank of Nepal has mandated the ‘Fit and Proper Test’ for founders and directors of hire purchase companies. The central bank has amended the hire purchase loan policy for the sixth time, introducing a system of interest rate determination based on fund costs. According to the revised policy, companies can now also provide installment loans for electrical appliances such as washing machines and vacuum cleaners. Kathmandu, 26 Shrawan — Nepal Rastra Bank has initiated the ‘Fit and Proper Test’ to assess the suitability and qualifications of founders and directors of hire purchase companies. Previously, this test was conducted only for founders of banks and financial institutions, but from the upcoming fiscal year, it will be applied to the founders and directors of hire purchase companies as well. The central bank has clarified that renewal of hire purchase company licenses will not be granted without passing this test.
The bank has revised the 2070 policy on granting approval to hire purchase loan companies for the sixth time, incorporating fund costs as a basis for interest rate determination. According to this, an additional 2 percent fund cost can be added to the existing base interest rates. Additionally, loans under hire purchase can now be extended for washing machines, vacuum cleaners, and dishwashers. Hire purchase loans refer to installment credit extended for purchasing vehicles, machinery, washing machines, refrigerators, vacuum cleaners, dishwashers, and other electrical equipment for agricultural, industrial, commercial, or domestic use, where ownership transfers only after full payment. The amendment states, “Approval will be granted to hire purchase loan companies only after founders, shareholders, and directors proposed for approval successfully pass the Fit and Proper Test.”
License approval must be renewed every ten fiscal years, with a renewal fee of NPR 200,000. Companies will be allowed to lend up to a maximum of 80 percent of the collateral value when extending loans. Vehicle loans will be subject to guidelines issued by banks and financial institutions. Hire purchase companies must base their interest rates on the fund cost, which includes the weighted cost of equity and debt funds. Disclosure of interest rate information is mandatory and must be reported to the central bank within three days. Interest rates charged to customers cannot fluctuate more than 2 percent from the published rates. The previous ceiling allowing up to 4 percent interest rates has now been removed.
When approving loans, hire purchase companies may charge up to 1 percent of the loan amount as service fees from customers; however, additional fees can be charged through other institutions if necessary, provided the fees do not exceed the actual costs. Companies must submit quarterly reports on their operations, loan disbursement, and interest rates to the central bank’s relevant department. Further, details on total loans, loan loss management, major borrowers, and multi-brand investments must also be provided. Hire purchase companies are required to invest mandatorily in multi-brand vehicles and equipment and disclose this information on their websites. After opening an additional contact office, companies must notify the relevant department within 15 days. According to current laws, founders must be at least 21 years old, mentally sound, and free from legal or tax-related impediments. Individuals convicted or penalized for criminal or corruption offenses are not eligible to be founders or directors. The financial status of the founders’ investment must be sufficient to sustainably operate the company. Market makers or brokers from the Nepal Securities Market are prohibited from being founders of hire purchase companies.
