NRB relaxes working capital loan guidelines

Nepal Rastra Bank (NRB) has amended working capital loan guidelines following pressure from the government and the private sector. The revised guidelines provide flexible provisions, especially for the manufacturing sector.

Issuing a circular on Monday, the central bank has given relief to the manufacturing sector. thereby giving a boost to the country’s productive segment. The term ‘manufacturing industry’, according to the NRB, refers to an industry that adds value to raw materials or semi-finished goods through human effort or machinery.

The central bank through the new amendment has relaxed several provisions that were initially put in place to curb the potential misuse of loans. The working capital loan guidelines have been a contentious point of debate between the private sector and the central bank over the past year. Ever since the implementation of the guidelines, the private sector has been lobbied hard for its suspension, terming the guideline as the 'major obstacle to the business and private sector growth'.

The central bank implemented the guidelines starting on October 18, 2022. The essence of bringing working capital loan guidelines was to stop the misuse of the bank money taken to meet short-term commercial needs for an unlimited period of time and outside of the purpose. The central bank has sought to discourage practices of misuse of working capital loans, a significant portion of which businesspersons use to invest in real estate and the stock market, after getting such loans from banks and financial institutions. 

 Of late, business bodies have been lobbying for its revision saying that the working capital loan guidelines was the main reason for the economy slowing down. In view of growing discontent,  Prime Minister Pushpa Kamal Dahal and Finance Minister Prakash Sharan Mahat have also instructed the central bank to relax the guidelines.

 As per the new amendment, manufacturing industries will not have to comply with the guidelines while using loans up to Rs 30m. Earlier, this limit was only up to Rs 10m.

 Similarly, the loan limit of fluctuating working capital needs that industries can take for one year has been increased to 40 percent of the annual turnover from the existing 25 percent. Businessmen have been demanding to increase this limit.

 The central bank has also increased the working capital loan limit for the manufacturing sector to Rs 40m from the existing Rs 20m. Now, while determining the working capital loan limit of up to 40m rupees for the manufacturing industry, it is stipulated that the total working capital loan limit should be maintained only up to the maximum amount of 20 percent of the estimated annual turnover/sales.

 The central bank has allowed banks to provide working capital loans up to 50 percent of the maximum annual turnover based on the industries' operating cycle, cash conversion cycle, days sales outstanding, inventory conversion period, lead time, and accounts payable period.

 The new amendment has changed the previous provision of reducing working capital loans to zero for seven consecutive days after the third year of implementation of the guidelines, allowing at least 10 percent of the amount to be retained in the account annually. Industrialists and businessmen have been demanding that the provision to reduce the working capital loan to zero is unreasonable and should be abolished.

 Additionally, a provision has been established for granting emergency working capital loans to seasonal businesses (e.g., those involved in purchasing chemical fertilizers, festival-related enterprises, etc.) based on justifications.

 The central bank Spokesperson Dr. Gunakar Bhatta said that the guidance has been revised to invigorate economic activities. According to Bhatta, more concessions have been given to the manufacturing sector. "While the amendment has provided ease to other businesses, special concessions have been given to the manufacturing sector," said Bhatta, "We have removed the provision of reducing working capital loans outstanding to zero."