Himal Press 
KATHMANDU: Nepal Rastra Bank (NRB) has significantly revised the rules governing hire-purchase companies.
The central bank introduced the changes through the sixth amendment to the Policies and Procedural Provisions for Approving Companies Providing Hire-Purchase Loans, 2013, issued Tuesday.
The central bank has, among other things, replaced the existing interest rate spread limit with a cost-of-funds-based system and extended the license renewal period from two years to 10 fiscal years.
Under the revised system, the previous maximum 4% interest rate spread has been scrapped. Hire-purchase companies will now determine lending rates based on their cost of funds by adding a specified premium. The cost of funds must be determined based on the cost of equity and the weighted cost of funds obtained through debt. They are also required to disclose the basis and rates. Companies can adjust the published lending rate by up to 2 percentage points when extending loans to customers.
Ten hire-purchase companies are currently in operation in the country. Interestingly, all of them are tied to business houses involved in the automotive business.
The revised provisions also allow hire-purchase companies to charge a service fee of up to 1% of the approved loan amount. Previously, companies were not allowed to charge fees other than interest.
One of the most significant changes is the extension of the license renewal period. Companies previously had to renew their licenses every two years. Under the revised provision, they will now need to renew their licenses only once every 10 fiscal years. The renewal fee, however, remains unchanged at 200,000 rupees.
However, the central bank has tightened eligibility requirements for company founders and directors. Proposed founders and directors must now pass a mandatory ‘fit and proper’ test, which will apply at the time of license renewal for existing companies.
The revised rules have also linked the lending limits of hire-purchase companies to those applicable to banks and financial institutions.
Loans extended to purchase vehicles will now have to comply with the limits set for banks and financial institutions. This means hire-purchase companies will have to follow the applicable loan-to-value limits for electric and private vehicles.
Hire-purchase companies can reschedule loans only when a borrower submits a written request citing valid reasons, and the company’s board must approve the rescheduling for a specified period.
The revised policy has explicitly brought hire-purchase companies under the regulatory framework for preventing money laundering and terrorist financing.
Companies will now be required to comply with the central bank’s provisions on anti-money laundering and combating the financing of terrorism applicable to hire-purchase companies.
They will also need prior approval from Nepal Rastra Bank to relocate their head office or branch offices.
The central bank has introduced mandatory investment in multiple brands, requiring companies to invest in vehicles, machinery, tools, and equipment manufactured by more than one brand.
The revised provisions also expand reporting requirements. Hire-purchase companies will have to submit details on loans consumed, lending institutions, and interest rates; total loans and loan-loss provisions; their 30 largest borrowers; investments in multiple brands; balance sheets and profit-and-loss statements; and key financial indicators within 15 days of the end of every quarter.
