NRB expands interest capitalization facility for long-term projects, Orders banks to maintain 24/7 financial crime response system

KATHMANDU: Nepal Rastra Bank (NRB) has amended the Integrated Directives, 2080, introducing significant changes to provisions related to interest capitalization and account freeze procedures, a move expected to provide relief to long-term infrastructure projects while simultaneously tightening the banking sector’s role in combating financial crimes.

The revised directive broadens the scope of interest capitalization beyond a handful of designated sectors and mandates banks and financial institutions to maintain a 24-hour response mechanism to support investigations into financial crimes.

Interest Capitalization Facility Extended to All Long-Term Projects

Under the previous framework, interest capitalization was permitted only in selected sectors such as hydropower, cement, pharmaceuticals, hotels, and hospitals, subject to necessity and justification.

The amended directive has now expanded eligibility to all long-term projects that have not yet commenced commercial operations and are unable to generate cash flow, provided the arrangement is clearly specified in the loan agreement.

Banks will now be allowed to capitalize interest on such projects after approving a board-endorsed operational procedure. The procedure must include detailed disclosures regarding eligible sectors, project cash-flow analysis, debt servicing capacity, and equity contribution ratios.

The central bank’s move is expected to benefit large-scale infrastructure investments, particularly projects with extended gestation periods that require substantial financing before becoming operational.

Major Relief for Hydropower Developers

One of the most notable changes concerns Nepal’s hydropower sector, where several completed projects have faced operational delays due to the lack of transmission infrastructure.

Previously, uncertainty existed regarding how interest expenses would be treated when a power plant was completed but could not generate electricity because transmission lines were unavailable.

The revised provision now allows banks to partially capitalize interest expenses for hydropower projects that are unable to operate at full capacity due to transmission line constraints. The capitalization can be carried out to the extent that sales revenue is insufficient to cover interest obligations.

Importantly, NRB has clarified that such capitalization will not be treated as loan restructuring or rescheduling, providing significant regulatory relief for project developers and lenders alike.

The change is expected to improve the financial viability of hydropower projects that have been adversely affected by delays in grid connectivity, a recurring challenge in Nepal’s energy sector.

Flexibility During Natural Disasters and Force Majeure Events

The amended directive also introduces greater flexibility for projects affected by natural disasters or circumstances beyond the control of borrowers.

If project completion is expected to be delayed by more than two years due to force majeure events, banks may extend the grace period and capitalize interest during the extended period.

However, lenders must maintain a loan loss provision of 12.5 percent against such facilities, ensuring that the banking system remains adequately protected against potential credit risks.

This provision is expected to provide breathing space to infrastructure and industrial projects vulnerable to earthquakes, floods, landslides, and other unforeseen disruptions.

New Accounting Requirement for Capitalized Interest

To improve transparency in financial reporting, NRB has introduced a separate accounting classification for capitalized interest.

Banks will now be required to record such amounts under a dedicated category titled “Interest Capitalized Term Loan.”

Previously, capitalized interest was not necessarily disclosed under a distinct heading, making it difficult for regulators and stakeholders to assess the extent of capitalization within loan portfolios.

The new requirement is expected to enhance transparency regarding the quality of banking assets and the risks associated with deferred interest obligations.

Banks Required to Operate 24/7 for Financial Crime Investigations

In a separate but equally significant amendment, NRB has strengthened provisions relating to account freezes and account unfreezing procedures.

The central bank has directed banks and financial institutions to establish round-the-clock coordination mechanisms to support investigations related to money laundering, fraud, cybercrime, and other financial offenses.

Under the previous arrangement, banks largely relied on official correspondence and notices published on NRB’s website, with no clearly defined timeline for action.

The revised framework now requires banks to respond immediately to verbal or written requests made by authorized investigation officers.

To facilitate rapid communication, every bank must maintain a dedicated contact number and publish it on its website, ensuring investigators can reach responsible officials at any time.

The new requirement effectively creates a 24-hour operational response system within the banking sector for account freezing and related enforcement actions.

Greater Accountability for Non-Compliance

NRB has also adopted a stricter stance on accountability.

The amended directive states that banks and responsible officials who fail to cooperate with investigations or delay implementation of account-freeze orders may face regulatory consequences.

The measure is designed to prevent delays that could allow suspects to move funds before authorities can take action.

Financial crime experts have long argued that time-sensitive enforcement is critical in preventing the dissipation of assets linked to fraud, cybercrime, money laundering, and organized criminal activities.

Enhanced Reporting and Digital Monitoring

The central bank has also revised reporting requirements to strengthen oversight.

Previously, banks were not required to disclose capitalized interest separately in their regular regulatory reports.

Under the new framework, reporting templates will include a dedicated column identifying the amount of interest capitalized by banks.

The amendment is expected to provide regulators with a clearer picture of the banking sector’s exposure to projects relying on capitalized interest and help monitor associated credit risks.

Similarly, information relating to account freezes and related actions must now be submitted through the Supervisory Information System (SIS) using a prescribed digital format.

The transition from manual reporting to a standardized digital reporting mechanism is expected to improve efficiency, accuracy, and regulatory oversight.

Implications for Nepal’s Banking and Infrastructure Sectors

The latest amendments signal a dual policy objective by Nepal Rastra Bank: supporting long-term investment and infrastructure development while strengthening safeguards against financial crimes.

For infrastructure developers, particularly in hydropower and large-scale industrial projects, the expanded interest capitalization framework could ease financing pressures during construction and operational delays.

For banks, however, the new rules impose greater compliance responsibilities, higher transparency standards, and continuous operational readiness in responding to regulatory and investigative requests.

The changes are likely to have far-reaching implications for project finance, banking supervision, financial transparency, anti-money laundering efforts, and Nepal’s broader investment environment.