NRB Allows Interest Capitalization During Grace Period for Long-Term Projects

KATHMANDU: Nepal Rastra Bank (NRB) has introduced a new provision allowing banks and financial institutions to capitalize interest accrued during the grace or moratorium period of long-term projects, providing significant relief to infrastructure and industrial investments with extended gestation periods.

Through an amendment to the Unified Directives, 2082, the central bank has permitted lenders to capitalize interest accumulated until a project begins commercial operation or starts generating cash inflows from production. However, NRB has made it mandatory for such arrangements to be clearly specified in the loan agreement at the time of lending.

The revised provision is expected to ease financing pressure on large-scale projects, particularly in sectors such as hydropower, manufacturing, tourism, healthcare and other infrastructure developments that typically require several years before generating revenue.

Banks Required to Develop Interest Capitalization Framework

To strengthen risk management and improve transparency, NRB has instructed banks and financial institutions to formulate and implement dedicated procedures governing interest capitalization.

According to the directive, the framework must clearly define eligible sectors, realistic project cash-flow analysis, conditions for repayment of capitalized interest, proposed capital plans and debt-to-equity ratios. Any decision to capitalize interest must also receive approval from the respective institution’s board of directors.

The central bank has sought to ensure that interest capitalization is used as a structured project financing tool rather than a mechanism to conceal stressed loans.

Additional Grace Period to Trigger Restructuring Classification

NRB has clarified that if a bank extends a previously approved grace period and capitalizes interest again, the loan will be classified as restructured.

In such cases, banks will be required to classify the exposure accordingly and maintain a minimum loan loss provision of 25 percent.

The provision signals the regulator’s intention to strike a balance between supporting long-term investment and safeguarding the health of the banking system.

Special Relief for Hydropower Projects

The amended directive introduces a notable exception for hydropower projects that have commenced production but remain unable to operate at full capacity due to delays in transmission line construction.

Under the new arrangement, banks may partially capitalize interest expenses to the extent that net electricity sales revenue is insufficient to cover interest obligations until the transmission infrastructure becomes operational.

Importantly, such capitalization will not be treated as loan restructuring, providing regulatory relief to both lenders and project developers.

The provision addresses a long-standing challenge in Nepal’s hydropower sector, where several completed projects have faced revenue losses due to delays in grid connectivity despite being technically ready for commercial operation.

Concession for Projects Hit by Disasters and Force Majeure Events

NRB has also introduced special provisions for projects affected by natural disasters, civil unrest or other circumstances beyond the borrower’s control.

Where project operations become impossible and resumption is expected to take more than two years, banks may recover overdue principal and interest, provide a fresh grace period and capitalize interest accrued during that period.

Although such loans will be classified as restructured, lenders will only be required to maintain a minimum loan loss provision of 12.5 percent, lower than the standard 25 percent requirement for restructured facilities.

The measure is expected to support businesses impacted by floods, landslides, earthquakes and other unforeseen disruptions.

Capitalized Interest to be Accounted Separately

To improve financial transparency, NRB has directed banks to maintain separate accounting records for capitalized interest under the heading “Interest Capitalized Term Loan.”

The repayment schedule for such capitalized interest facilities can be determined by the respective bank or financial institution based on an analysis of the project’s future cash flows.

The central bank has also explicitly prohibited capitalization of overdue interest associated with loans that have already been restructured or rescheduled.

What Qualifies as a Long-Term Project?

NRB has defined long-term projects as those requiring at least two years before commercial operation begins or cash inflows from production are generated.

The revised framework is expected to benefit infrastructure, energy, industrial and tourism projects by aligning financing structures with project cash-flow realities while maintaining regulatory oversight of credit risks.

Banking analysts say the amendment could support investment in large-scale productive sectors at a time when Nepal is seeking to accelerate infrastructure development, expand energy exports and attract greater private-sector participation in long-term projects.