KATHMANDU: Nepal Rastra Bank (NRB) has tightened the noose on the loans being provided by the banks and financial institutions (BFIs) based on the working capital of firms.
Issuing a Working Capital Loans Related Guideline 2022 on Tuesday, the central bank has maintained two slabs for the BFIs when they issue loans against the working capital. According to the new provision, if a firm has an estimated transaction of Rs 20 million or less per year, it will be eligible to get loan only up to 20 percent of the turnover amount.
A working capital loan is taken to finance day to day operation of a company. These loans are not issued to buy long-term assets or investments. In this category, Nepali banks issue cash credit, short-term loans, import-export related loans and term loans.
Based on the assessment of fluctuating working capital needs, the BFIs can issue a maximum of 25 percent of the annual transaction amount for the maturity period of up to one year. If the credit is demanded for the permanent working capital needed by the firm, the BFIs can issue term loans with the maturity period of at least five years’ period.
The firm looking for the working capital loans should submit their financial statements of the past five years. Similarly, the annual transaction amount is estimated by looking at the annual turnover of the past three years of the proposed firm. If the firm has the history of less than three years of its establishment, the BFIs can fix the annual transaction limit as per their policy on lending against working capital.
The firm receiving a working capital loan should utilize the credit amount for commercial purposes. It cannot use the amount in cash transfer or to settle its financial liabilities including payments to the business partners and employees, among others. “If any firm is found to be using the working capital loan in payments to their parties concerned, BFIs need to list such loan amounts under the bad debt” reads the guideline.
However in special cases, the BFIs can issue up to 40 percent of the annual transaction amount to the small firms having the aforementioned amount of transaction. “For the purpose, the BFIs need to assess the components like operating cycle, cash conversion cycle, day sales outstanding, inventory conversion period, lead time and accounts payable period, among others,” reads the guideline.
NRB has asked the BFIs to evaluate the firm’s paid up capital to carry out real time analysis of the credit limit and drawing power while issuing loans to the small firms. The maturity period of such credit should be of maximum one year.
NRB has also capped the working capital loan for a big firm that has an estimated annual transaction of more than Rs 20 million. According to the NRB guideline, the BFIs first need to analyze the permanent working capital needs and fluctuating working capital needs of the big firms while issuing loans to such firms.