The Nepal Rastra Bank issued a notice dated 11 Bhadra 2080 (28 August 2023) to licensed ‘A’, ‘B’ and ‘C’ class banks, financial institutions and Infrastructure Development Banks, amending the Working Capital Guidelines, 2079 (2022).
The amendments are intended to improve the accessibility and effectiveness of working capital loans, and so support financial stability and business growth. This note sets each amended provision against the one it replaces.
The Headline Changes
- A manufacturing industry carve-out raises every loan limit threshold: NPR 1 crore becomes NPR 3 crore, and NPR 2 crore becomes NPR 4 crore, where the borrower is a manufacturing industry.
- The discretionary cap on working capital loans rises from 40 per cent to 50 per cent of estimated annual turnover.
- Fluctuating working capital need, previously fixed at 25 per cent of turnover, can now reach 40 per cent on stated reasons.
- The requirement of zero arrears for seven consecutive days becomes arrears of less than 10 per cent, and applies specifically to cash credit accounts.
- A new provision exempts multi-year government, semi-government and multinational construction projects from mandatory limit reduction at renewal.
- “Manufacturing industry” is defined for the first time.
Loan Limits and Turnover Thresholds
| Provision | Existing provision | Revised provision |
|---|---|---|
| Para 3.1 | Determination of working capital loan limit up to NPR 1 crore. Where a borrower uses a total working capital loan of NPR 1 crore or less from the entire banking system, banks and financial institutions may determine the limit according to their own working capital loan policies. The nature of loans provided for working capital purposes must still follow the guidance. | Determination of working capital loan limit up to NPR 1 crore, and up to NPR 3 crore for manufacturing industries. The guideline does not apply to borrowers availing working capital loans totalling up to those amounts from the entire banking system; institutions are free to set the limit under their own policies, with the nature of the loans still following the guidance. |
| Para 3.2(a) | Determination of working capital loan limit up to NPR 2 crore. The cumulative limit must be maintained at up to 20 per cent of projected annual turnover, for a duration of one year or less with the option of renewal. Where the licensed institution identifies a need of a special nature on analysing the operating cycle, cash conversion cycle, days sales outstanding, inventory conversion period, lead time and accounts payable period, the total limit may go up to a maximum of 40 per cent of estimated annual turnover, with reasons recorded in the loan file. | Determination of working capital loan limit up to NPR 2 crore, and up to NPR 4 crore for manufacturing industries. The 20 per cent cumulative cap and one-year duration are unchanged. Where the institution deems it reasonable on the same analysis, the total limit may go up to a maximum of 50 per cent of estimated annual turnover, with reasons recorded in the loan file. |
| Para 3.3(a) | Determination of working capital loan limit exceeding NPR 2 crore. Permanent and fluctuating working capital needs must be identified separately. | Determination of working capital loan limit exceeding NPR 2 crore, and up to NPR 4 crore for manufacturing industries. The requirement to identify permanent and fluctuating need separately is unchanged. |
| Para 3.3(b) | The limit for fluctuating working capital need must not surpass 25 per cent of estimated annual turnover, for a duration of one year or less with the option of renewal. | The 25 per cent ceiling remains, but where the institution deems it reasonable on analysing the operating cycle, cash conversion cycle, days sales outstanding, inventory conversion period, lead time and accounts payable period, the limit may be maintained up to a maximum of 40 per cent of estimated annual turnover, with reasons recorded in the loan file. Duration remains one year or less with renewal. |
| Para 3.4 | Where a permanent working capital need is identified even for borrowers using working capital loans below NPR 2 crore, institutions may provide loans of less than one year for fluctuating need and 3 to 10 years for permanent need, provided the total remains within NPR 2 crore. | The same applies for borrowers using working capital loans up to NPR 2 crore, and up to NPR 4 crore for manufacturing industries. The total loan limit is instead subject to the limitations in Para 3.2(a). |
Definition of Manufacturing Industry
The amendment adds an explanation to Para 3, where previously there was none:
A manufacturing industry is one that produces goods using raw materials or semi-finished goods, utilising human labour and machinery with value addition.
Reporting, Renewal and Review
| Provision | Existing provision | Revised provision |
|---|---|---|
| Para 6.4(b) | For working capital loans exceeding NPR 5 crore, a half-yearly statement certified by the internal audit of the borrower organisation is required. | For working capital loans exceeding NPR 5 crore, a half-yearly statement certified by the internal auditor or auditor of the borrower organisation is required. |
| Para 7.5 | On renewing a working capital loan and reviewing the loan for permanent need, the loan may be renewed and reviewed only after adjusting the limit based on the variance analysis under Para 7.4. | The same requirement applies, but where the borrower requests time to submit a true and fair financial statement on reasonable grounds, this does not obstruct renewal or review, subject to Para 10.16. |
| Para 7.7 | No provision. | It is not mandatory to reduce the loan limit through variance analysis at renewal and review during the project period, for loans granted for multi-year projects under project agreements relating to construction projects of government, semi-government and multinational organisations. Banks must still ensure the borrower’s working capital loan arrears do not exceed a set percentage of Net Trading Assets under their own policy. |
Cash Credit Account Arrears
| Provision | Existing provision | Revised provision |
|---|---|---|
| Para 8.6 | Depending on the nature of the business, all renewable working capital loan accounts must have zero arrears for at least seven consecutive days at some point in a fiscal year. This could be phased over three fiscal years from the effective date: under 30 per cent in the first year, under 20 per cent in the second, and under 10 per cent in the third. | Among the various working capital loan accounts, the cash credit loan account must have arrears of less than 10 per cent of the credit limit for at least seven consecutive days at some point in a fiscal year. The phasing runs: under 30 per cent in the first year, under 20 per cent in the second, and from the third year onward borrowers must maintain arrears of less than 10 per cent. |
Loan Policy and Ad-hoc Loans
| Provision | Existing provision | Revised provision |
|---|---|---|
| Para 9(b) | Matters relating to the repayment schedule and recovery procedures of working capital loans. | Matters relating to the procedure and methodology for calculating working capital loans, distinguishing permanent from fluctuating working capital, as well as the repayment schedule and recovery procedure. |
| Para 10.3 | No loan may be provided, and no limit enhanced, for the purpose of repaying a loan at the same or another institution. Where there is an unexpected need of financial resources connected to the borrower’s business, an ad-hoc working capital loan may be provided by transferring the appropriate amount. If such loans are renewed or not used as intended they must be classified as bad, with a 100 per cent loan loss provision. Where a borrower needs ad-hoc loans more than once in a financial year, the board of directors may decide to provide them. | The prohibition and the 100 per cent provisioning consequence are unchanged. Loans of this nature may also be granted to seasonal businesses (for example the purchase of chemical fertilisers, or festival-related business) subject to proper justification. The board of directors threshold moves to ad-hoc loans needed more than twice in a fiscal year. |
Speak to Our Team
If you need to assess how the revised thresholds affect your facility, or whether your business qualifies for the manufacturing carve-out, get in touch with Bishal Panthi, Chartered Accountant, or Samir Khadka, Chartered Accountant. You can also contact the firm directly, or read more about our corporate and project finance and financial planning and reporting services.
This publication is not intended to be used as a basis for undertaking any significant transactions, financial or otherwise, without consulting appropriate professional advisers.
Read the Original Briefing
The full comparative analysis, including the original side-by-side table, is reproduced below and available to download.