Central bank issues guidance note on interest income recognition under NFRS 9, Mandates quarterly accounting for all BFIs

KATHMANDU: Nepal Rastra Bank (NRB) has released a comprehensive Guidance Note on Interest Income Recognition, 2025 that mandates standardized quarterly interest income recognition practices for all banks and financial institutions (BFIs) in line with NFRS 9 – Expected Credit Loss (ECL) Guidelines. The regulatory instruction aims to resolve long-standing inconsistencies in how BFIs recognize interest income—particularly for credit-impaired (Stage 3) assets—and facilitate a gradual shift towards full implementation of effective interest rate methods in financial reporting.

The guidelines come into effect starting fiscal year 2081/82 and will be rolled out in three transitional phases to help BFIs implement system upgrades and policy alignment. The NRB has emphasized that from FY 2083/84, interest income must be recorded quarterly based on the stage of the financial asset at the end of the previous quarter, not the current one.

Key Provisions from the Guidance Note:
1. Staging-Based Quarterly Interest Recognition Mandatory
From FY 2081/82 onward, BFIs must maintain stage-wise quarterly records of interest income across Stage 1 (Pass), Stage 2 (Watchlist/Restructured Performing), and Stage 3 (Non-performing/Restructured Non-performing) financial assets.

The interest income from all quarters must be aggregated to calculate the annual interest income disclosed in financial statements.

2. Three-Phase Implementation Plan
Year 1 & Year 2 (FY 2081/82 and 2082/83):
Stage 1 & 2 Assets: Interest income based on coupon interest rate on the principal outstanding using accrual basis.

Stage 3 Assets: Recognition through incremental cash basis approach, meaning only the interest actually received in cash is recognized, after adjusting for accrued interest receivable (AIR) and interest suspense.

Year 3 (FY 2083/84):
Stage 1 & 2 Assets: Interest to be recognized using effective interest rate on gross carrying value.

Stage 3 & POCI Assets: Interest recognized using effective interest rate on amortized cost.

Old Term Loans: For loans booked up to end of Ashadh 2083, interest is to be calculated using a deemed effective interest rate, excluding integral fees already recorded.

3. Definitions Clarified
The guidance note defines several critical terms to ensure uniform implementation:

Gross Carrying Amount: Value of asset before loss allowance.

Amortized Cost: Gross carrying amount minus ECL provision.

Deemed Effective Interest Rate: Used in Year 3 only for old loans where full effective rate implementation isn’t feasible.

POCI (Purchased or Originated Credit Impaired): Loans disbursed to accounts already classified as Stage 3 in the previous quarter.

4. Interest Suspense Restrictions
Interest suspense cannot exceed the amount of accrued interest receivable at reporting date.

Suspense entries must be reconciled quarterly with general ledger, actual receipts, and customer account details.

5. Effective Interest Rate Accounting
From FY 2083/84:

Stage 3 and POCI Assets:
Interest Income = Effective Interest Rate × (Gross Carrying Value – ECL Provision)

Stage 1 and 2 Assets:
Interest Income = Effective Interest Rate × Gross Carrying Value

For old term loans:

Interest on Stage 1 and 2 is calculated using deemed effective rate on gross value.

Stage 3 interest is still based on the effective rate on amortized cost.

6. Audit and Supervision Requirements
BFIs must maintain detailed, account-level records of interest income, stage classification, accrued interest, and suspense to comply with audit and NRB supervisory checks. Institutions must be able to justify and demonstrate how each interest figure has been recognized.

Practical Example Provided
The guidance includes a detailed quarterly illustration using fictional borrowers under different stages, interest rates, and ECL provisions. In one scenario:

A borrower with a loan of Rs. 100,000, classified as Stage 3, with a 25% ECL provision, would have an amortized cost of Rs. 74,625.

With an effective interest rate of 8%, the quarterly interest income is Rs. 1,472, calculated from the adjusted amount rather than full principal.

This method ensures that revenue recognition reflects credit risk more accurately and discourages overstatement of income from impaired loans.

Accounting Treatment for Effective Implementation
A detailed accounting matrix is included, showing debits and credits related to:

Gross carrying value adjustments.

Interest income booking.

ECL provision increase.

Unwinding of ECL discounts.

These align with IFRS guidelines on curing of credit-impaired financial assets.

Compliance Deadlines and Supervisory Implications
Quarterly reporting in full compliance becomes mandatory starting FY 2083/84.

BFIs are expected to upgrade their systems and internal policies by that date.

Non-compliance or incorrect recognition practices may invite regulatory scrutiny or penalties under NRB’s unified directives.

The NRB has made it clear that these changes are essential for accurate financial reporting and alignment with international accounting norms. All BFIs must comply with the guidelines starting Asadh-end 2081 for staging and from Shrawan 2083 for effective interest rate calculations.